HDFC Large and Midcap fund to absorb three schemes: What should investors do?

Two close-ended schemes and an equity linked savings scheme (ELSS) – HDFC Long Term Advantage (HLTA) – will merge with HDFC Large and Midcap Fund.

Now, HDFC Large and Midcap Fund (HLMF) is the largest scheme among these. Here is how the merger could impact its portfolio.

HLMF is required to have a minimum of 35 percent allocation each to large and mid-cap stocks, as per SEBI’s categorization norms.  

Data from ACE MF shows that as of November 30, 2021, HLMF (AUM of Rs 3,183 crore) allocated 42.4 percent of its assets to large-caps, 36 percent to mid-caps and 8.4 percent to small caps.

However, both the close-ended schemes, as well as HLTA are large-cap heavy, with 77-80 percent allocation to large-cap stocks, and minimal allocations to mid-caps. HLTA (AUM of Rs 1,318 crore) in fact has no mid-cap exposure, but over 16 percent is invested in small-cap stocks.

Distributors say the process of absorbing so many schemes may get complex for the fund manager.

“The fund manager of HLMF will have to re-arrange the portfolio and sell some stocks if there is too much concentration due to the merger. If the concentration ends up in small-caps, selling might take time due to lack of liquidity in this segment,” points out Deepak Chhabria, chief executive officer and director at Axiom Financial Services.

Data from ACE MF shows that there were only seven common stocks across the four schemes (data as of November 30, 2021), and all these stocks are of large-cap companies.

HLTA was closed for any fresh investments with effect from May 16, 2018 after SEBI introduced the new scheme categorization norms, allowing only one scheme per category. However, HLTA continued for existing investors as an ELSS comes with a three-year lock-in for tax-saving.

Since then, the scheme has delivered 65 percent returns. This is a tad less than the 67 percent returns delivered by HDFC Large and Midcap Fund for the same period.

The two close-ended scheme – HDFC EOF - II - 1126D May 2017 (1) and HDFC EOF - II - 1100D June 2017 (1) – were supposed to mature in July 2020, but were rolled over with new maturity in set for January 2022.

To be sure, the move has helped the scheme’s returns. Until July 2020, HDFC EOF 1126D and HDFC EOF 1100D had given negative returns of 12 percent and 17 percent, respectively. Since then, the schemes have given 55 percent and 56 percent returns, respectively.

Since launch, HDFC EOF 1126D has given returns of 36.4 percent and HDFC EOF 1100D has delivered returns of 29.9 percent. However, given the smaller sizes of HDFC EOF 1126D (Rs 87 crore) and HDFC EOF 1100D (Rs 239 crore), their portfolio’s past performance should not have much impact on the final scheme’s portfolio.

Still, the fund manager would need to make sure that any major laggards from the portfolios are removed.

The scheme merger would allow the investors of the close-ended schemes to continue with their investments if they don’t want to exit right now. If the investors of HLTA don’t want to book profits right now, they can also continue once the scheme gets merged into HLMF.

The investors of all the schemes have been given a load-free 30-day exit window to redeem their investments if they want to. For the close-ended schemes, the last date is January 14, 2022, while for HLTA and HLMF, the window is open till January 20, 2022. Investors may also exit later.

As scheme mergers are deemed fundamental changes, SEBI rules require mutual funds to give an exit window to investors.

If you have been an investor in HLTA, your new scheme (HLMF) is not a tax-saving equity scheme; it’s a plain-vanilla equity scheme. If you wish to stay invested in a tax-saving scheme, you can switch over any other tax-saving from MC30 – Moneycontrol’s curated portfolio of 30 investment-worthy mutual fund schemes.

Those who have stayed invested in the other two close-ended schemes could wait and monitor performance. Gopal Agrawal, HLMF’s fund manager comes with a good track record. HLMF investors should watch out for any drastic changes in the scheme’s portfolio, over the next 3-6 months.