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One of India’s largest and most popular mutual fund scheme, HDFC Prudence Fund is all set to be merged and renamed to the new HDFC Balanced Advantage fund. HDFC Mutual Fund house has decided to make this change to comply with SEBI guidelines on mutual fund categorization. Another equity fund namely HDFC Growth Fund is also to be merged to form HDFC Balanced Advantage fund.

HDFC Prudence Fund

HDFC Prudence Fund is India’s largest mutual fund scheme with assets of Rs 36,594 crore as on 31 March 2018. It is also one of the longest-running mutual fund schemes in India operating since 1994. The fund has given a spectacular 18.9% p.a. return since its launch. Managed by Prashant Jain, HDFC Prudence is one of the top performing funds in the Balanced category.

The monthly dividend plan of HDFC Prudence Fund gave 1% dividend per month till March 2018. The lure of such a high monthly income attracted many investors to this fund.

Why is HDFC Prudence being changed to a new fund?

SEBI has come out with a circular on how mutual funds should be classified and labeled. This circular defines various mutual fund categories. SEBI also mandated that a mutual fund company like HDFC Mutual Fund can have only 1 fund scheme per category. HDFC Prudence Fund was a Balanced Fund with 65% – 80% allocation to equity (stocks) and remaining into debt (bonds) and cash. The fund house also runs another popular Balanced fund scheme called HDFC Balanced Fund. (HDFC Balanced Fund is merged with HDFC Premier Multi-Cap Fund and the same has been renamed as HDFC Hybrid Equity Fund w.e.f. June 01, 2018)

To meet the SEBI guidelines, HDFC Mutual Fund has chosen to continue HDFC Balanced Fund in the erstwhile Balanced Fund category now called Hybrid Aggressive Fund.  On the other hand, HDFC Prudence Fund will now fall in a new category of Hybrid funds – Balanced Advantage (BAF) or Dynamic Asset Allocation Fund (DAA). SEBI defines this category as “Investment in equity/debt that is managed dynamically“.   ICICI Mutual Fund runs a popular fund scheme called ICICI Prudential Balanced Advantage Fund (also known as ICICI BAF)With the conversion of HDFC Prudence to BAF, HDFC Fund will challenge ICICI Fund’s leadership in this category.

How good is the new HDFC Balanced Advantage Fund?

The new HDFC Balanced Advantage Fund would also come in the Hybrid category like erstwhile Balanced funds or the new Hybrid Aggressive funds. The technical difference is that while Hybrid Aggressive funds have their equity allocation above 65% – 80% at all times, the equity-debt percentage split in a BAF/DAA fund can swing substantially either side based on market conditions. Fund houses have their internal criteria to arrive at the equity-debt split at any given time.

NIFTY 50 Hybrid Composite Debt 65:35 Index will be the benchmark for this new fund. Prashant Jain and Rakesh Vyas, the erstwhile fund managers of HDFC Prudence Fund would continue to manage the new fund. Prashant Jain has managed and grown HDFC Prudence for 24 years. He is one of the most regarded fund managers in India. According to our internal sources, there is going to be no real change in this fund from HDFC Prudence Fund.

Should I stay invested in HDFC Prudence Fund?

Now coming to the big question! Should you stay invested or sell your investment in HDFC Prudence Fund? While the fund category has changed, we expect the new fund to continue with HDFC Prudence investment strategy. The net equity exposure in HDFC Balanced Advantage Fund is likely to be around 70-80%, same as erstwhile HDFC Prudence Fund. Prashant Jain and Rakesh Vyas continue to be fund managers of the new fund.

The 1% monthly income from HDFC Prudence took 11.65% cut in April due to the new Dividend Distribution Tax. The monthly dividend from the new HDFC BAF fund should continue around the 0.88% p.m. rate. If you are generating monthly income from HDFC Prudence Dividend plan, you should switch to Growth plan and SWP strategy. With the introduction of DDT Tax, the SWP strategy can get you higher monthly income than Dividend plans. Refer to our earlier article on SWP vs Dividend for Monthly Income for a detailed explanation.

We recommend existing investors to stay invested in HDFC Prudence Fund since we expect similar returns as before. Investors may consider switching from Dividend plan to SWP strategy for monthly income. For investors who are looking to invest in a true Dynamic Asset Allocation Fund, you may rather consider ICICI Prudential Balanced Advantage Fund or Motilal Oswal Dynamic Fund.

Can I Redeem without Exit Load from HDFC Prudence Fund?

The change to the new fund would be effective from June 1, 2018. HDFC has given an option for existing investors to exit between May 3, 2018, and June 1, 2018. There will be No Exit Load on investors who redeem their investments in HDFC Prudence from May 3 to May 31, 2018.

To evaluate your existing mutual fund portfolio or to get expert investing advice, feel free to reach out to Upwardly. We are reachable on 1800-102-1265 or