HDFC Prudence and HDFC Balanced had swelled up to such AUM levels that whatever the AMC did to comply with SEBIs categorization rules, disruption was inevitable and it is indeed the case. In what was a baffling development (to me), HDFC announced that HDFC Growth Fund will be called HDFC Balanced Advantage Fund and that HDFC prudence will be merged into this new fund (balanced advantage). HDFC Premier Multi-Cap Fund will be called HDFC Hybrid Equity Fund and HDFC Balanced will be merged into this new fund (hybrid equity). A discussion on what should investors do now.

What is baffling to me is that in the announcement, HDFC has not compared HDFC balanced or prudence with the old scheme. Perhaps this is deliberate to avoid panic but at the same also irresponsible, considering the huge AUM at stake. It is a bit like merging a mall with a roadside shop and comparing the new entity with the roadside shop and ignoring the mall. The analogy does not make sense, so does what HDFC has done.

Use this mnemonic to remember: HDFC Balanced is (now) a hybrid fund. Prudence (now) has Balanced Advantage.

For HDFC Balanced Investors

The old asset allocation as per scheme document: Equity 60% with a 20% deviation (it has always been an equity fund) and the rest in bonds (30% deviation). HDFC Hybrid Equity Fund now has an equity allocation that can swing bet 65-80% with rest in bonds and the irritating new sidekick REITs. So it is clear that the new fund will also be an equity-oriented balanced fund.

Old benchmark: Crisil Balanced Fund Aggressive Index Nifty 50 index – 65% + CRISIL Composite Bond Fund Index – 35%

New benchmark: NIFTY 50 Hybrid Composite Debt 65:35 Index. This is a clear indication that the investment strategy (to beat the benchmark) will not be much different.

Expected new risk profile: I expect it to be similar to the old fund.

Expected return profile: because of the above, should be similar.

Hold or Exit? Hold and invest more. Plumbline status: Intact, may add one more fund in this category. Plumbline is my list of hand-picked funds.

Please note, balanced funds are only a touch less risky than equity funds. They are suitable only for long-term goals.

For HDFC Prudence Investors

The old asset allocation could vary equity fro 40-75% (but it always remained an equity fund, at least after HDFC acquired it). The new fund – HDFC Balanced Advantage Fund can have 0-100% equity. So the fund has completely changed character on paper. This cannot be refuted. So what on Earth does “balanced advantage” mean?

The fund manager will determine asset allocation between equity and debt depending on prevailing market
and economic conditions. The debt-equity mix at any point of time will be a function of interest rates, equity valuations, medium to long term outlook of the asset classes and risk management etc.

I have no idea what that means and I believe it is irresponsible to write such vague statements when such AUM is at stake.

Old benchmark: Crisil Balanced Fund Aggressive Index Nifty 50 index – 65% + CRISIL Composite Bond Fund Index – 35%

New benchmark: NIFTY 50 Hybrid Composite Debt 65:35 Index. This possibly means that it will remain equity oriented at least most of the time.

Expected new risk profile: lower than before.

Expected return profile: because of the above, lower than before

Hold or Exit? If you are close to your goals or have achieved enough for your goals, you can afford to hold or even invest more (as per your need). If your goals are far away then I think it would be better to exit. Why? Because this fund may not return as much as you expect and therefore it is better to exit now than later. If you have retired and hold this fund, then continue.

If you decide to hold and/or invest more: when you redeem if the average last 12-month equity holding is less than 65% then it will be classified as a debt fund by the taxman. Read more: Should I pay tax if my “equity" mutual fund holds less than 65% of equity?

Let me know if you have any comments or queries.

When ICICI Dynamic became ICICI multi-asset I had suggested that investors hang on as that is not a big change. Prudence to Balanced Advantage is a big change (on paper)

Disclosure: Am an investor in both HDFC prudence and HDFC balanced. Will remain invested in both as hdfc balanced is for my retirement and prudence for my kids education. That goal is comfortably placed so can afford the lower risk.

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