HDFC Long Term Advantage Fund was launched in January 2001 and is closing its doors after about 17 years of existence. This is an ELSS fund which offers tax deductions on contributions under Section 80C. The scheme isn’t being closed because it did badly, but because SEBI rules stipulate that a fund house must only have one scheme per category. HDFC AMC has another larger scheme in this category called HDFC TaxSaver Fund which will continue to exist.
How did HDFC Long Term Advantage Perform?
The fund has delivered a CAGR of 22.6% since inception. CAGR or Compounded Annual Growth rate measures the average annual return of a scheme which has existed for several years. HDFC TaxSaver, its larger and older cousin, launched in 1996 did even better with a CAGR of 26.16%. HDFC Long Term Advantage has also delivered good five and three-year returns. These are lower than the long-term CAGR of 22.5% but still respectable at 18% and 14% respectively.
Why it is being closed down
SEBI introduced a new fund classification system in October 2017. One of the primary aims of this system was to eliminate multiple funds offered by the same fund house in the same category. Each fund house was to pare down its offerings per category to just one scheme.
HDFC Long Term Advantage Fund has performed well but is much smaller than HDFC TaxSaver. The fund has a size of Rs 1,515 crore but this is only about a fourth of the size of HDFC TaxSaver at Rs 6,656 crore. This is probably why the AMC has chosen to continue with HDFC TaxSaver rather than HDFC Long Term Advantage Fund
How will investors be affected?
The fund will stop accepting fresh lump sum investments as well as SIPs and STPs from 16th May 2018. However, the fund will continue to exist for a period of three years from 16th May. After that, as per the AMC notice, it may be merged with any open-ended scheme of the AMC.
Existing investors will not lose out on their tax benefits. Even after the scheme is merged, they will not be automatically subject to tax. Mutual fund scheme mergers are not treated as taxable events.
However, if the scheme is merged with a fund that is not to your liking you may want to exit the scheme. In this case, you will be given an exit load free period of about one month to leave. Such an exit can trigger a tax liability on the gains you have made in the fund. That, however, is a problem for the future.