The eagerly awaited announcement of the HDFC hybrid scheme mergers is out. HDFC Balanced and Premier Multi-cap funds will be merged to form a new scheme while HDFC Prudence and HDFC Growth Fund will be merged to form another new scheme.
The merger of these schemes of HDFC AMC is following the SEBI’s new rules on fund classification released in October 2017, which stipulated that there can be only one scheme per category. AMCs across India are in the process of complying with these rules and all eyes were on India’s largest fund house. HDFC AMC released these changes this week and they will go into effect on 1st June 2018. Investors who wish to exit can do so from 3rd May to 1st June 2018 without paying any exit load.
A merger between two funds will not create any tax liability for those investors who stay put. However, those investors who exercise the exit option either during the load-free period or after will be liable to pay capital gains tax. In case of exit from equity-oriented funds such as the one described in this article, this is levied at 15% for holding periods of less than one year and 10% for holding periods greater than one year. Gains up to 31st January are exempted from tax for holding periods more than one year, and a tax-free limit of Rs 1 lakh is given.
HDFC Balanced and Premier Mutli-cap merge into HDFC Hybrid Equity Fund
HDFC Balanced is an equity-oriented hybrid which can allocate 40-80% in equities and 10-70% in debt. However, its equity allocation is usually maintained above 65%. It currently has 68% of its assets in equities at present and the balance 32% in debt. It has an AUM of Rs 20,401 crore and has delivered 16.55% annualized since its launch in 2000.
HDFC Premier Multi-cap is a much smaller scheme of Rs 295 crore focusing on large and mid-cap companies. It is allowed to allocate 85-100% to equities and the balance 0-15% to debt.
The new scheme will be an ‘Aggressive Hybrid Fund’ allocating 65-80% in equities, 20-35% in debt, 0-10% in REITs and InVITs and 0-10% in non-convertible preference shares.
HDFC Balanced currently has CRISIL 35+65 as its benchmark, comprising of the S&P BSE 200 (65%) and CRISIL Composite Bond Fund Index (35%). HDFC Premier Multi-cap has the Nifty 500 as its benchmark.
These will change to Nifty 50 Hybrid Composite Debt 65:35 which consists of Nifty 50 TRI (Total Returns Index) accounting for 65% and Nifty Composite Debt Index accounting for 35% of the benchmark.
Vinay Kulkarni is the current manager of HDFC Premier Multi-cap. He will be replaced by Chirag Setalvad who manages HDFC Balanced, as the manager of the merged entity. Rakesh Vyas will stay on as manager for any overseas investments, the fund may make.
Commentators see the merger of HDFC Premier Multi-cap into the new scheme as a radical transformation and have asked its investors to exit. These investors will find themselves shift from an equity-dominated scheme to one which can allocate as much as 35% to debt.
HDFC Prudence and Growth merge into HDFC Balanced Advantage Fund
HDFC Growth Fund is a pure equity scheme which can invest 80-100% of its assets in equities and 0-20% to debt. It has an AUM of Rs 1,129 crore.
HDFC Prudence is a hybrid equity fund. It is allowed to allocate 40-75% to equities and 25-60% to debt. Its equity allocation is also usually maintained above 65%. It is a behemoth with an AUM of Rs 36,594 crore. It has a current equity allocation of 73% and a debt allocation of 27%.
HDFC Balanced Advantage will be classed as a ‘Balanced Advantage/Dynamic Asset Allocation’ Fund which can go from 0-100% in either equity or debt and 0-10% in REITs/InVITs and non-convertible preference shares.
HDFC Prudence currently has CRISIL 35+65 as its benchmark, comprising of the S&P BSE 200 (65%) and CRISIL Composite Bond Fund Index (35%). HDFC Growth currently has the Sensex as its benchmark. These will change to the Nifty 50 Hybrid Composite Debt 65:35 which consists of Nifty 50 TRI (Total Returns Index) accounting for 65% and Nifty Composite Debt Index accounting for 35% of the benchmark.
Prashant Jain, the current manager of HDFC Prudence, will manage the merged fund. Srinivas Rao Ravuri, the current manager of HDFC Growth, will be dropped. Rakesh Vyas will stay on as manager for any overseas investments, the fund may make.
The explicit orientation given to investors in HDFC Growth Fund and HDFC Prudence is gone. The fund can turn wholly towards debt if the fund manager so chooses. Investors, who want firmly an equity fund, can consider exercising the exit option.