While Donald Trump is the president of the Giant – United States; Kim Jong Un is known for his dictatorship of the much tiny nation – North Korea.

However, President Trump did fly halfway around the globe to meet Kim Jong Un, and even agreed to terms that favour North Korea.

Will this historical meet yield satisfactory result of assuring peace and balance the power?

Will it set a way for more close dialogues between the two?

Will it have an impact on the global markets and on your investments?

Only time will tell.

But what about the two popular balanced funds owned by the largest fund house in the Indian mutual fund industry?

Have these lost their existence?

Technically, both the schemes have been merged with other non-balanced schemes to form a new scheme.

While HDFC Prudence Fund is now merged with HDFC Growth Fund to form HDFC Balanced Advantage Fund, the other HDFC Balanced Fund has been merged with HDFC Premier Multi-Cap Fund to form HDFC Hybrid Equity Fund.

Researching and analyzing mutual funds for over a decade now, I have hardly seen such an unusual merger. And I will tell you why.

But, before that have a look at the table below.

Scheme Old Name	HDFC Prudence Fund	HDFC Growth Fund	HDFC Balanced Fund	HDFC Premier Multi-Cap Fund
Old Category	Open-ended balanced scheme	Open-ended equity scheme	Open-ended balanced scheme	Open-ended equity scheme
Status	Merged with HDFC Balanced Advantage Fund	Changed attributes and renamed as HDFC Balanced Advantage Fund	Merged with HDFC Hybrid Equity Fund	Changed attributes and  renamed as HDFC Hybrid Equity Fund
Scheme Current Name	HDFC Balanced Advantage Fund		HDFC Hybrid Equity Fund
Current Category	Balanced Advantage Fund		Aggressive Hybrid Fund
Inception Date	1-Feb-94	11-Sep-00	11-Sep-00	6-Apr-05
Corpus (Rs) As on April 30, 2018	37,997 Crore	1,180.88 Crore	21,778.95 Crore	302.82 Crore
Expense Ratio – Regular Plan (as on April 30, 2018)	2.19%	2.29%	1.92%	2.61%
Expense Ratio – Direct Plan (as on April 30, 2018)	1.04%	1.59%	0.77%	1.96%
Equity Allocation as on April 30, 2018	75.24%	98.11%	67.87%	95.41%
Debt & Cash Allocation as on April 30, 2018	24.76%	1.89%	32.13%	4.59%
Equity Allocation effective June 1, 2018	Upto 100%		65% to 80%
Debt Allocation effective June 1, 2018	Upto 100%		20% to 35%
Fund Manager	Prashant Jain	Srinivas Rao Ravuri	Chirag Setalvad	Vinay Kulkarni
New Fund Manager	Prashant Jain		Chirag Setalvad
Returns as on April 30, 2018
1 Year (Absolute)	6.89	13.96	11.96	4.51
3 Years (CAGR)	10.71	12.89	12.45	7.99
5 Years (CAGR)	17.01	15.46	19.52	15.05
Since Inception (CAGR)	18.77	18.04	16.62	13.69

Source: HDFC Mutual Fund FactSheet - April 2018; Addendum of change in attributes and merger; ACEMF; PersonalFN Research

As you may be aware, last year the Securities and Exchange Board of India (SEBI) asked fund houses to align all their schemes—and merge if required—to 36 categories as defined by SEBI.

Following the circular, HDFC Mutual Fund too released the list of changes in fundamental attributes of its schemes, although in multiple tranches. The announcement of changes and merger of its two balanced funds with other diversified equity schemes came in the fifth Tranche.

After going through the addendum notice, I was certainly disappointed with what was proposed for the funds.

While I was sure that both schemes won't be merged together due to their huge size, I wasn't expecting these giant schemes to be merged with other tiny pure equity schemes, which do not even come close to the hybrid strategy.

You can see, from the table, how the fund house smartly converted its diversified equity schemes into hybrid schemes first, and then merged the existing hybrid schemes into them to form new hybrid scheme.

To top it up, the fund house changed the fund managers of the base schemes and gave the reins of the funds to the fund managers who were handling the original hybrid funds.

Now what about the historical performance of the schemes? Will the fund house stick to the performance of its original balanced funds or will it carry forward the performance of its diversified equity schemes?

When it comes to displaying the performance of merged schemes, SEBI's circular on performance disclosure post consolidation/ Merger of Schemes states…

1. If two schemes (transferor scheme and transferee scheme) with similar mandates are merged, the fund house will display a weighted average performance of both the schemes.

2. If, Scheme A (transferor scheme) merges with Scheme B (transferee scheme) and the features of Scheme B are retained, then Scheme B's performance will be retained.

3. If, Scheme A (transferor scheme) merges with Scheme B (transferee scheme) and the features of Scheme A are retained, then Scheme A's performance will be retained.

4. If two or more schemes are merged and a new scheme is born out of it (with a mandate that is different to that of the merged schemes), then this new scheme will not carry any past performance.

Now let us see, what the consequence would have been in each of the above scenarios…

1. If HDFC Prudence Fund and HDFC Balanced Fund (both with similar mandates) were merged, the fund house would had to display the weighted average performance of both the schemes. However in the process of doing this, the combined size of both the funds would have been about Rs 60,000 crore. So, this option was out of consideration.

2. If HDFC Prudence Fund (transferor scheme) is merged with HDFC Balanced Advantage Fund (i.e. HDFC Growth Fund) and the features of HDFC Balanced Advantage Fund are retained, then the performance of HDFC Balanced Advantage Fund (i.e. HDFC Growth Fund) will be retained.

   Similarly HDFC Balanced Fund (transferor scheme) is merged with HDFC Hybrid Equity Fund (i.e. HDFC Premier Multi-Cap Fund) and the features of HDFC Hybrid Equity Fund are retained, then the performance of HDFC Hybrid Equity Fund (i.e. HDFC Premier Multi-Cap Fund) will be retained.

3. If HDFC Prudence Fund (transferor scheme) is merged with HDFC Balanced Advantage Fund (i.e. HDFC Growth Fund) and the features of HDFC Prudence Fund are retained, then HDFC Prudence Fund's performance will be retained. Similarly, if HDFC Balanced Fund (transferor scheme) is merged with HDFC Hybrid Equity Fund (i.e. HDFC Premier Multi-Cap Fund) and the features of HDFC Balanced Fund are retained, then HDFC Balanced Fund's performance will be retained.

   But this has not been the case. And, hence, the performance of HDFC Prudence Fund and HDFC Balanced Fund cannot be retained.

4. If two or more schemes (HDFC Prudence Fund and HDFC Growth Fund) are merged and a new scheme (HDFC Balanced Advantage Fund) is born out of it (with a mandate that is different to that of the merged schemes), then this new scheme (HDFC Balanced Advantage Fund) will not carry any past performance. But before the merger, HDFC Growth Fund was already converted into HDFC Balanced Advantage Fund. So this condition does not apply. Similarly, in the case of HDFC Balanced Fund too, HDFC Premier Multi-Cap Fund was already converted into HDFC Hybrid Equity Fund, before the merger.

As I mentioned, in this case, the fund house first changed the features/attributes of HDFC Premier Multi-Cap Fund and HDFC Growth Fund before merging HDFC Balanced Fund and HDFC Prudence Fund into them, which means it will retain the performance of HDFC Premier Multi-Cap Fund and HDFC Growth Fund, respectively. This is despite their historical performance being a result of completely different strategy.

While there can be various assumptions to this, but to be frank, it's far beyond anyone's understanding why the fund house had to merge a Giant scheme like HDFC Prudence (Corpus about 38,000 crore) with a tiny scheme HDFC Growth Fund (Corpus 1180 Crore).

Similarly, HDFC Balanced Fund with a corpus of over 21,700 crore is too large to be merged into a pint-sized HDFC Premier Multi-Cap Fund (corpus of 300 crore). Instead, merging tiny schemes into larger ones would have been a much easier exercise.

Another question many investors would probably have is, Was there really a need for such an irrational merger?

Why didn't HDFC Mutual Fund  simply do an apple-to-apple merger?

For instance, it could have easily merged HDFC Premier Multi-Cap Fund with HDFC Equity Fund, which it categorized as Multicap. On the other hand, HDFC Growth Fund could have been merged with another large-cap oriented fund like HDFC Large Cap Fund (which it transformed into Large & Mid Cap Fund and renamed as HDFC Growth Opportunities Fund).

Had this been the case, HDFC Prudence Fund could have been easily renamed to HDFC Balanced Advantage Fund and HDFC Balanced Fund into HDFC Hybrid Equity Fund, without going through the hassle of an unwarranted merger process. But sometimes, even prominent fund houses make irrational decisions.

The consequences…

• Technically, both HDFC Prudence Fund and HDFC Balanced Fund are non-existence anymore. So the historical track record of both these funds won't be technically relevant for the new schemes.

• While HDFC Hybrid Equity Fund will now retain the features and performance of HDFC Premier Multi-Cap Fund, HDFC Balanced Advantage Fund will retain the features and performance of HDFC Growth Fund.

• It is a complete hassle for the large investor base of HDFC Prudence Fund and HDFC Balanced Fund to see that additional merger transaction in their account statement carrying a drastic change in the number of units and the NAV of some other fund, which they will find unusual.

• Post-merger, the asset belonging to HDFC Prudence Fund will be managed a bit differently due to the category and allocation it has been placed in; the assets of HDFC Balanced Fund will closely follow its original style. Although both the funds will miss their long track record of over decades to back them.

• Notably, both the hybrid schemes will be managed by their original fund managers, who may still do justice in terms of bringing back the track record for the fund.

Why HDFC Mutual Fund did this is anybody's guess, which only the fund house can answer. It has not provided any logical explanation on this, to its investors. However the loss of track record may surely disappoint investors of these funds, and they may find it difficult to judge the long-term potential of the funds.

Nevertheless, this change may not have much impact on our views and rating of both these funds, as our research process is not performance driven. We give higher weightage to qualitative aspects like portfolio characteristics and fund management as well. So, even if these funds may have lost their performance, the qualitative features of the funds will help us assess them well in the future.

Notably, the major portion of the assets of the new hybrid funds belongs to HDFC Prudence and HDFC Balanced Fund. Moreover, the proposed features and characteristics too are more in line with these funds.

So even if HDFC Mutual Fund may have technically killed HDFC Prudence and HDFC Balanced Fund and their track record, in terms of portfolio, they still exist for investors.

For investors, I would say, it's time to move away from historical performance and star ratings, and consider a credible research process driven more by qualitative factors and less in terms of quantitative elements.

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You don't want to miss this. Act Right Now.

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ARCHWDY@YAHOO.COM Jul 24, 2018 I had purchased HDFC Prudence Fund a year back at Rs.440/-per unit wh0se NAV as on 1st June'18 stood at about Rs.500/-. Even after the merger the NAV was as at same level, but now I suddenly find NAV of HDFC balanced Adv Fund i.e the new fund down to around Rs.180/- if I am not mistaken. So if the underlying assets remain almost same then why this erosion in NAV. It is a big loss to an investor.

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