Should I exit Mutual Fund because of Paytm holding?

Should I exit Mutual Fund because of Paytm holding? As of December 2023, around 68 mutual funds are holding the Paytm stock in their portfolio.

Recent RBI action on Paytm company created a lot of negative news about the company. Many funds are holding this stock. I don’t want to dwell much on what prompted RBI to initiate the action and what is the future of this company. My idea of writing this post is to those mutual fund investors whose funds are holding the Paytm stock.

As of December 2023, around 68 mutual funds are holding the Paytm stock. In September 2023, the number of stocks holding was 1,77,77,085. It increased to 2,11,46,868 in October 2023. In November 2023, the number of stocks held by Mutual Fund Companies was 2,10,14,596 and in December it was 3,15,10,986.

Do remember that Paytm (One97 Communications Ltd.) is part of the Nifty Midcap 150 Index and as per the current holding structure, its weightage is 0.51%. Regarding the Nifty LargeMidcap 250 Index, the exposure is 0.64%.

The exposure is with respect to indices. Hence, Index Funds have to match the ratio wherever the Paytm stock is there. However, beyond this certain active funds have exposure to this stock. That may be a concern for many active fund investors.

Do remember that this post is not about active vs passive. Currently, passive fund investors may be smiling as the exposure is less. However, in some cases, it may be reversed. Hence, let us not dwell on the aspect of active vs passive.

Below is the list of all mutual fund companies that are currently holding Paytm Stocks (as of December 2023).

Should I exit Mutual Fund because of Paytm holding?

Let us now discuss more about the core topic of this post.

Do remember that such incidents are common and as a mutual fund investor you are prone to such risks. However, how much % of your fund is holding this stock matters a lot.

If you are a passive investor –

If you are a passive fund investor, you can’t blame anyone as it’s part of the Index. Luckily it is a small part of indeices and hence not a worrying factor.

Do remember that this is the risk with passive funds also. Currently, the company with which the incident happened has less exposure and you may be happy. However, if the incident happens to a company whose exposure is high, then it will impact your holding.

However, as the exposure is small, you may not sense the huge volatility or downtrend in your funds. Hence, as it is not under your control and Paytm’s exposure is small, you do not need to bother. For how many days it stays in the indices due to the continued downfall in its market cap matters a lot.

Hence, as of now, no big concern for passive fund investors. But as I cautioned, Index Funds are not foolproof products to avoid such incidents in the future.

If you are an active fund investor –

If you are an active fund investor, then obviously you have taken a risk of believing in the fund manager’s capability to do research and deploy your money in various stocks. Hence, you have no other option but to continue with the same firm belief. Do remember that fund managers are not gods nor human computers who can perform 100% precisely. Hence, they are also prone to human error, behavior biases, and misjudgment.

If you are comfortable with the exposure, then continue. Otherwise, take a call based on your risk-taking ability, and your belief in fund managers’ strategy.

You noticed that in the case of active funds also, you have no control over how much % the fund manager can invest in a particular sock (in %). Hence, even though the fund is benchmarked to a certain Index, the % of holding may change. Hence, taking a call based on underlying stocks, churning rate, and fund managers history matters a lot.

Lesson – Active Funds are prone to fund managers’ risk and passive funds are prone to construction risk. Choosing the right active and right passive fund matters a lot rather than taking a call based on such incidents. You have to think before investing but not after investing.