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India’s Largest Equity Oriented Fund – HDFC Balanced Advantage – An Overview

India’s largest equity oriented fund (more than 65% equity) in 2018 was HDFC Prudence with assets of Rs 36,000 crores in early 2018. It has now been renamed as HDFC Balanced Advantage Fund (BAF). Today let us take a deeper look into this fund to see how the reclassification has impacted the fund.

Background

In 2018 the market regulator SEBI has asked mutual funds to reclassify their funds so that investors can be clear about where they are investing. SEBI has created 36 categories of funds and several fund houses have had to merge and align funds so that they fit into a category.

India’s largest equity oriented fund – HDFC Prudence was impacted as HDFC Mutual fund had two funds in the erstwhile balanced category – HDFC Balanced and HDFC Prudence. Both these funds used to have between 65 to 75% equity allocation and they had an excellent track record.

Fund Changes

HDFC Prudence was merged into HDFC Growth and it was classified as a balanced advantage fund. Hence, the fund was renamed as HDFC Balanced Advantage fund. As per the mutual fund website page for HDFC BAF (click here), the Investment objective is as follows “To provide long term capital appreciation / income from a dynamic mix of equity and debt investments.”

No additional information is available. The SID (scheme information document) link given in the Documents tab in the website is for the SID of HDFC Growth from April 2017. There are no leaflets or product presentations for HDFC BAF. In the overall SID section a SID for BAF is there (click here).

In their product positioning document in April 2018 (click here), HDFC BAF is at the extreme right end of the expected risk return spectrum for hybrid funds. This is above HDFC Hybrid Equity which is a Hybrid aggressive fund with an explicit mandate to invest in equity

Current Fund Portfolio and Category Comparison

With a change in mandate from HDFC Prudence to BAF let us take a look at the portfolio between April 18 (Prudence) and Aug 18 (BAF).

  • There is no major change in the portfolio either on the debt or equity side
  • The Equity allocation has actually gone up from 75%in April to 78% in August (for comparison, the average BAF fund has 40% in Equity)
  • The Cash holdings of the fund is 1% (The average BAF fund has 28% holdings in cash)
  • The standard deviation and beta of the fund is twice that of ICICI BAF (the pioneer in this category)
  • The debt portion of the fund has an average maturity of 5.25 years, against the peer group average of 1 year
  • The top 10 holdings on the equity side and the top 5 holdings on the debt side has remained constant during the last 6 months or so
  • The portfolio turnover is around 14.5% compared to ICICI BAF Portfolio turnover of 500%

Based on current information, it is clear that HDFC has retained the HDFC Prudence portfolio in BAF without making major changes to the portfolio. This has helped the fund house retain nearly 39,000 crores of assets in a fund with a great track record.

What should Investors do now

Investors looking for a high-risk hybrid equity fund similar to erstwhile HDFC Prudence can continue to hold on to the fund. This is an excellent high-risk hybrid fund run by a superb fund manager.

Investors looking for lower risk balanced advantage funds may look at other funds in the category. The biggest mismatch is for those investors who are investing in HDFC BAF treating it as a balanced advantage fund as per it’s stated objectives.

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