FundsIndia Views: HDFC Balanced is merging. Should you worry?

May 2, 2018 . Bhavana Acharya



What is happening? HDFC Balanced is merging into another fund and will be called HDFC Hybrid Equity fund. This is done to comply with SEBI norms of having only one fund in each category.


Is the fund changing its strategy? No. The fund will wear a new name but keeps the same portfolio, benchmark and fund manager. The change to the fund is virtually non-existent.


What should you do? Since nothing changes, you should continue to hold the fund and continue systematic investments. The fund remains among the best in its category.

For investors in HDFC Balanced fund, last week dropped what seemed a bombshell. HDFC Balanced is merging into another fund. Is this worrisome? What changes in the fund? Should you be concerned about your investments in this fund?

The answer is no. Though the fund is merging, the new fund will retain the characteristics of HDFC Balanced. As far as investment strategy, portfolio, and performance potential goes there will be no change at all. Here is explaining the merger and why you should not let it affect your investments in the fund.

The merger schematics

HDFC Balanced will first merge into HDFC Premier Multicap. HDFC Premier Multicap is a pure equity fund at this time, investing across market capitalisations. Once this is done, HDFC Premier Multicap will see its name change to HDFC Hybrid Equity fund.

HDFC Hybrid Equity will invest between 65 and 80% in equity and the remaining will be held in debt. Its benchmark will be the Nifty 50 Hybrid Composite Debt 65:35 index. HDFC Hybrid Equity’s manager will be Chirag Setalvad and Rakesh Vyas.

Fund post merger

When any fund merges, you need to know the following:

  • Whether the new fund suits you or not, which will be based on the new fund’s characteristics. That is, if you compare the strategy or portfolio of the new fund to the merging fund you hold, how much is it different?
  • Does the new fund’s risk level change significantly?
  • Would its performance potential change?

In the case of HDFC Balanced-HDFC Premier Multicap merger, it is HDFC Balanced’s strategy portfolio and fund management that will continue post the merger. Therefore, for investors in HDFC Balanced, there will be no change at all in performance, risk, and suitability.

In its new mandate, HDFC Hybrid Equity can invest between 65 to 80% in equity, 20 to 35% in debt, and up to 10% in REITs/InvITs. This is along the lines of HDFC Balanced’s old mandate and portfolio. It will not become a pure equity fund or take on the characteristics of HDFC Premier Multicap.

HDFC Balanced Advantage fund currently holds equity exposure of around 68%. Historically, the fund has moved between 67-70% in equity exposure. The remaining has been in debt. By its new mandate, however, the fund had the freedom to move up to 80% in equity – it just has rarely, if ever, gone to that extent.

Therefore, HDFC Hybrid Equity will continue to be managed as a balanced fund in the exact manner that HDFC Balanced is currently. True, there is the introduction of REITs/ InvITs. However, these are also hybrid instruments that offer price appreciation opportunities as well as a relatively steady income stream. Such instruments are already being used by other hybrid funds and this addition just allows HDFC Balanced to opt for it, when it wants to.

Next, consider the benchmark. The Nifty 50 Hybrid Composite Debt 65:35 index is very similar to CRISIL’s index for balanced funds and HDFC Balanced’s benchmark. The index combines the Nifty 50 index and a composite of corporate debt indices ranging different maturities and credit ratings. Therefore, there is limited change on the benchmark. The category of the new fund will be an aggressive hybrid fund, similar to what a balanced fund is today.

The fund manager provides the final reassurance in continuation of strategy. Chirag Setalvad is the longstanding fund manager of HDFC Balanced. HDFC Premier Multicap’s current primary fund manager Vinay R. Kulkarni will not be the manager of HDFC Balanced.

In a nutshell, HDFC Balanced merges into an equity fund, dons a new name but keeps the same portfolio, benchmark and fund manager. The change to the fund, therefore, is virtually non-existent. In fact, it is investors of HDFC Premier Multicap who will see a significant change to their fund even though it is not the one undergoing a merger.

HDFC Balanced with an AUM of Rs 20,401 crore is several times the size of HDFC Premier Multicap at Rs 295 crore. The fund may not find it hard to absorb the AUM of HDFC Premier Multicap.

What you should do

The simple answer is – remain invested in HDFC Balanced. If you have systematic investments in the fund, continue with it. The merger notification period is from May 3 to June 1, post which the fund merges and the name changes. The option you held in HDFC Balanced (dividend or growth) will continue to be the option in HDFC Hybrid Equity post the merger. Similarly, the SIP/STP/VIP/VTP/SWP that you have in HDFC Balanced today will continue in HDFC Hybrid Equity.

For investors in HDFC Premier Multicap, the change is significant since the fund will morph from an equity fund to a hybrid fund. This brings down the risk levels and reduces equity exposure. But from a performance standpoint, the new fund could serve better. HDFC Premier Multicap is currently a stark underperformer in the diversified or multicap category. Its ability to beat the Nifty 500 and peers is well below average. In fact, on a rolling 3 year returns for the past 10 years, HDFC Balanced beat HDFC Premier Multicap 92% of the time!

HDFC Balanced – performance and strategy

Rolling HDFC Balanced’s 3 year returns over 5 years has it beating the CRISIL Hybrid 35+65-Aggressive index and the category average all the time. The average of these 3-year annualised returns, at 16.9% is well above the category’s 13.9%. In a shorter 1 year timeframe rolled over 3 years too, the fund does better than the category nearly all the time.

HDFC Balanced also scores on containing losses during correcting markets, the hallmark of a good balanced fund. A good measure of this is the capture ratio, which measures how much of the market’s gains or losses a fund captures. On this metric, HDFC Balanced has among the lowest downside capture ratios (i.e., it falls much lesser than the market does).

On the equity side, the fund invests across market capitalisations and can take significant mid-cap allocations. This helps it boost returns despite the relatively lower equity exposure. On the debt side, the fund usually sticks to top-rated corporate and bank debt and doesn’t actively manage it. This changed in the past couple of years as opportunities were ripe in duration; the fund stepped up allocations to gilts to make gains off bond price rallies on rate cuts. While gilt holding has come down in the past few months as rate cuts fade out, gilts still carry a 10% allocation. This has kept recent returns capped compared to those peers that don’t have such duration calls.

HDFC Balanced is among the best in its category. It is best not to give in to the panic and confusion created by its merger.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.