Do you know which is the largest single mutual fund scheme today in India? It is HDFC Prudence Fund with over Rs. 36,000 crores in assets under management. Popularly known as a balanced fund, the scheme is undergoing a surgery (literally). So, what is happening?
In the ongoing drive for scheme rationalisation and recategorisation, HDFC Mutual Fund has announced changes to its schemes too. In some cases, just a name change has happened, while in other cases the fundamental characteristics, category and taxation too have undergone changes.
HDFC Prudence fund falls in the latter space.
HDFC Prudence, as we know it, may just cease to exist.
So, what is changing about HDFC Prudence?
Here are the key changes.
#1 HDFC Prudence is getting merged with another scheme, the HDFC Growth Fund, a pure equity fund. The Growth fund will first be converted into a Balanced Advantage Fund – one of the categories approved by SEBI. Then the HDFC Prudence fund will be merged into this HDFC Balanced Advantage Fund.
HDFC Prudence is now HDFC Balanced Advantage Fund.
#2 HDFC Prudence used to have a minimum 65% investment of funds in equities (in reality over 75%). As a balanced advantage fund, it now has a mandate to invest 100% in debt or 100% in equity.
#3 Because of the minimum 65% investment in equities, the fund took benefit of equity taxation. This could be now under threat. If for any year, the average investment in equities falls below 65%, the taxation for debt funds will apply.
#4 For those who were in the fund for the lucrative dividends may be disappointed on that front. The dividends may not be as much or as frequent.
What should you do?
HDFC Prudence Fund has provided itself greater flexibility by choosing the category of Balanced Advantage Fund. There are no internal limits. It is as good as a multicap category.
Hence, it is quite likely that nothing may change about the fund. Or it may! This remains to be seen.
However as someone said, “when facts change, I change my mind.”
The facts are laid out in front of you.
If the above changes do not align with your investment plan, then you may exit.
The Exit option window
The fund house has provided an Exit Option window to the existing investors from May 1 2018 till June 1 2018.
If you choose to redeem during this window, the Securities Transaction Tax or STT too will be borne by HDFC AMC.
Note: In case of NRIs, any TDS will still be deducted as per the requirement of tax laws.
Any other long term or short term capital gains will apply as per tax laws.
What about taxation post the change or merger?
You will be allotted new units in the new scheme as per the NAV of the new scheme. In this case, HDFC Premier Multicap is the scheme which is first undergoing the change and HDFC Prudence will be merged into this new scheme.
So, the NAV as on the date of the merger will apply to your HDFC Prudence investment for allotment of new units. The subsequent tax calculation will be based on the NAVs of that fund and your current NAV as on the date of sale/switch.
For the purpose of calculation of holding period and capital gains, the purchase date of the original fund (before merger), will apply.
What is the option for a Hybrid Aggressive OR a Balanced fund?
Well, there are several options out there from various fund houses.
Within HDFC AMC, HDFC Balanced Fund continues to retain its characteristics. However, it will now be known as HDFC Hybrid Equity Fund and fall in the Hybrid Aggressive category defined by SEBI.
Another equity fund, HDFC Premier Multicap Fund will be changed to HDFC Hybrid Equity Fund and HDFC Balanced fund will be merged into it.
HDFC Balanced Fund is now HDFC Hybrid Equity Fund.
The new fund is likely to be managed the same way as HDFC Balanced. The investment into equity will be in the range of 65% to 80%, hence it will continue to enjoy the equity tax status.
What are you doing with your HDFC Prudence investment? Do share in the comments.
Both HDFC Funds are going to underperform for next decades.Instead of merging they should have created smaller funds with clear mandate with new fund managers.These funds have made invester poorer while made fund distributers and managers millionaires.
Well, you said the big truth. The ‘business’ of investing works very differently. The merger is more about accounting and retaining assets than anything else.
What is the need of keeping two hybrid funds by HDFC AMC..one HDFC balanced fund another HDFC prudence fund…?
A question only HDFC AMC can answer!
Thank you for the wonderful informative article. I have HDFC Prudence dividend payout option for regular income purpose. I want regular income. I understand that dividends are not guranteed and value may fluctuate. Should I exit from this in exit window period? Please let me know your brief view about switching my investments in Reliance Hybrid Equity, ICICI Pru. Equity & Debt & Principal Balanced Fund? Thanks
If you are looking for regular income from an hybrid fund, chances are you can be disappointed either on the frequency or the quantum. The others you mention are no different. You need to plan your regular income differently. My humble view.
I have a significant investment in HDFC Balanced Fund Direct Growth option.
Will like to come out of it and reinvest in other funds, either in the same AMC or elsewhere. I am 65 and my investment goal is capital preservation with reasonable returns.
Shall value your advice, Vipin.
I am not sure if I understand you fully. Happy to provide advice after knowing the correct requirements. Thanks!
I had invested in HDFC Prudence for getting dividend monthly since I am a retired person. Now there seems to be some kind of doctoring going on about this scheme. Should we go out of this scheme and opt for swp? Will this save us the burden of dividend tax? Kindly advise.
If you are invested in a dividend option, any dividend declared will attract the dividend tax. If you don’t have an intention of paying that, then you should choose the growth option. Just check if you are withdrawing more than you need. That can lead to unnecessary taxation.
I am holding substantial quantity of hdfc prudence growth fund. Does it make sense to change over to HDFC Balanced fund now. If so should I start an STP from Prudence to Balanced .
That depends on what you expect of the fund.