The impact is significant because HDFC Bank has traditionally been a core holding across large-cap, flexi-cap, index and banking-focused mutual funds. As the stock has struggled, funds with sizeable exposure have also faced pressure on their returns.
HDFC Bank becomes a major drag on Nifty
HDFC Bank’s decline has made it the single biggest drag on the Nifty this year, according to the latest analysis.
The stock is also the worst performer in the Nifty Bank index, making its weakness particularly important for investors who hold banking-focused funds or passive products tracking major market indices.
Because of the bank’s enormous market capitalisation and high index weight, a sharp movement in its share price can have a disproportionate impact on benchmark indices.
This also means that investors may feel the impact indirectly through mutual funds even if they do not own HDFC Bank shares themselves.
Why mutual funds are affected
Mutual funds invest investors’ money across a basket of stocks. When a particular stock represents a sizeable portion of a scheme’s portfolio, a decline in that stock can pull down the fund’s net asset value (NAV).
HDFC Bank has historically featured prominently in portfolios of several large mutual fund schemes.
For actively managed funds, fund managers can decide whether to reduce their exposure. However, index funds and exchange-traded funds generally have to maintain exposure in line with their benchmark’s composition.
This makes HDFC Bank’s decline relevant to a broad section of mutual fund investors.
HDFC Bank was once the top MF holding
The bank’s importance to mutual fund portfolios can be seen from the fact that it had remained the top stock holding in mutual fund portfolios for around three years.
However, that position changed in July 2026, when ICICI Bank overtook HDFC Bank as the largest stock holding across mutual fund portfolios.
The change reflects shifting investor preferences within India’s banking sector as well as the narrowing valuation gap between the two lenders.
Governance concerns surrounding HDFC Bank have also affected sentiment towards the stock.
Governance concerns weigh on sentiment
HDFC Bank has faced increased investor scrutiny following changes at the top of its leadership structure.
The resignation of former part-time chairman Atanu Chakraborty earlier this year raised questions among investors, particularly because his departure came with references to concerns surrounding certain developments at the bank.
The bank has also been dealing with the challenges associated with integrating and managing the business following its large merger with HDFC Ltd.
These issues have contributed to uncertainty around the stock at a time when investors are closely watching growth, margins and management decisions.
Earnings and margins remain important
Apart from governance concerns, investors have also been monitoring HDFC Bank’s operating performance.
The bank reported weaker-than-expected net interest margins in the first quarter of FY27, which contributed to pressure on the stock.
Net interest margin is particularly important for banks because it measures the difference between the interest earned on loans and the interest paid on deposits relative to earning assets.
When margins come under pressure, investors can become concerned about the bank’s ability to maintain profitability even when loan growth remains strong.
What does the fall mean for mutual fund investors?
A decline in HDFC Bank does not necessarily mean that investors should immediately exit mutual funds holding the stock.
The impact depends on the fund’s exposure.
For example, if HDFC Bank represents 8% of a diversified equity fund and the stock falls sharply, the direct impact on the fund’s NAV will be considerably smaller than the stock’s decline.
The remaining portfolio holdings can also offset some of the losses.
This diversification is one of the primary advantages of mutual funds compared with investing in a single stock.
Passive funds cannot easily avoid the stock
Investors in index funds and ETFs need to understand that passive funds have less flexibility.
A fund tracking an index such as the Nifty 50 generally holds stocks according to the index’s prescribed weights.
If HDFC Bank remains a significant constituent, the fund will continue to have exposure regardless of short-term concerns surrounding the stock.
Fund managers of actively managed schemes, on the other hand, can reduce or increase exposure depending on their investment strategy.
HDFC Bank’s size magnifies the impact
The bank’s sheer size makes its stock performance important beyond its own shareholders.
When a large company falls significantly, the effect can spread across:
- Nifty 50 index funds
- Large-cap mutual funds
- Flexi-cap funds
- Banking and financial-services funds
- ETFs tracking major indices
- Portfolios with direct HDFC Bank exposure
This is why HDFC Bank’s weakness has become a broader market story rather than simply an individual stock decline.
ICICI Bank gains prominence
The shift in mutual fund preferences towards ICICI Bank is another important development.
In July, ICICI Bank overtook HDFC Bank as the largest stock holding in mutual fund portfolios. The change marked the end of HDFC Bank’s three-year run at the top.
The development suggests that fund managers are increasingly reassessing the relative attractiveness of India’s largest private lenders.
It does not necessarily mean that investors have lost confidence in HDFC Bank completely. Rather, portfolio managers may be responding to valuation differences, earnings expectations and concerns surrounding the bank.
HDFC Bank shares show signs of stabilisation
Despite the substantial decline earlier in the year, the stock has shown occasional signs of recovery.
On August 20, HDFC Bank shares rose 0.88% to Rs 726.50, outperforming the broader market during that session.
The bank also raised $1.75 billion through a dual-tranche overseas bond issue, one of the largest international debt-market fundraises by an Indian financial institution. The development has attracted investor attention and could strengthen the bank’s funding position.
The Reserve Bank of India has also allowed LIC to increase its stake in HDFC Bank, providing another development that investors are monitoring.
Should investors worry about their mutual funds?
Investors should focus on the overall performance and portfolio strategy of their mutual fund rather than reacting solely to one stock.
A diversified fund may hold dozens of companies, meaning weakness in HDFC Bank can be offset by gains in other holdings.
Investors should also examine the fund’s current exposure, its long-term track record, investment strategy and whether its original investment objective remains unchanged.
Short-term stock movements alone are generally not sufficient reason to abandon a long-term mutual fund investment.
What to watch next
The next few quarters will be important for HDFC Bank.
Investors will closely monitor:
- Deposit growth
- Loan growth
- Net interest margins
- Asset quality
- Profitability
- Management and governance developments
- Institutional investor activity
- The bank’s ability to deliver post-merger growth
A sustained improvement in these areas could help rebuild investor confidence.
On the other hand, continued weakness in earnings or further governance concerns could keep pressure on the stock and, consequently, on funds with large HDFC Bank allocations.
Conclusion
HDFC Bank’s roughly 26% decline in 2026 has made it one of the biggest drags on India’s benchmark indices and has affected mutual funds holding the stock in significant quantities.
The impact is particularly relevant because HDFC Bank has historically been a major holding across India’s mutual fund industry. Although ICICI Bank overtook it as the largest mutual fund stock holding in July, HDFC Bank remains an important component of numerous active and passive portfolios.
For mutual fund investors, the decline should be viewed in the context of the entire portfolio, rather than as an automatic reason to sell. The bank’s future earnings, margins, deposit growth and governance developments will be key factors in determining whether the recent weakness proves temporary or becomes a longer-term challenge.