HDFC Mutual Fund - Arrogance

HDFC Mutual Fund – Is this what investors expect?

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HDFC Mutual Fund is one of the largest and the most respected fund houses of the country.

What would you expect from such a fund house?

That it would put its customer, the investor, at the centre of all that it does. I thought so too.

Unfortunately, the facts don’t support that notion.

While they might have started with it, I believe they are losing track.

They have indulged in greedy, big business like behaviour playing a upper hand and putting the investor at the receiving end. I am afraid the arrogance of being big is slowly creeping in.

Let me first put across 2 broad observations.

One, HDFC continues to maintain a large number of schemes with ever confusing names, unclear investment objectives and no differentiation.

They have 18 schemes just in the Equity category and many more in Hybrid and Debt. No doubt it has an overall Assets Under Management exceeding Rs. 1.75 lakh crore.

Sample the following:

Confusion galore.

The only reason and very well known to the insiders for the existence of this large a number of schemes is – to peddle one or the other depending upon which one shows the best performance numbers. They use the survivorship bias to the hilt.

Shouldn’t HDFC MF be merging these unnecessary duplicate schemes and offer simple and compelling investment options?

SEBI has been pushing all fund houses to do this for quite some time, yet there is no action. As a leader, they should set an example by doing it and not wait because the regulator, SEBI, wants it.

Two, the expenses that it charges to its funds, even those that with the largest assets in the industry, are quite high.

Take for example, HDFC Equity Fund and HDFC Top 200 Fund – the two largest fund schemes in the country by asset size.

The expense ratios for direct and regular plans respectively of each of these funds are

  • HDFC Equity        – 1.14% and 2.04%;         (AUM Rs. 16,046 crores)
  • HDFC Top 200    – 1.26% and 2.06%;         (AUM Rs. 13,208 crores)

At their size, these funds should charge much less and pass on the benefit to the investors.

That’s what a truly investor focused fund should do.

Let us now get more specific. Here’s a shocking example that makes me question –

Where’s the investor focus, HDFC Mutual Fund?

HDFC Mutual Fund has a large cap fund scheme called HDFC Large Cap Fund. It was formerly known as Morgan Stanley Growth Fund.

The investment objective of this fund states “to provide long-term capital appreciation by investing predominantly in large cap companies.”

The scheme’s benchmark is NIFTY 50, a large cap benchmark, which confirms its mandate and objective.
This puts it in the same set as funds like Franklin India Bluechip and Birla SunLife Frontline Equity – two prominent large cap funds.

The current AUM of HDFC Large Cap Fund is over Rs. 1,200 crores. This number might appear small compared to the other funds of HDFC Mutual Fund or in comparison to other funds in the large cap MF category. However, it is much larger than several other great funds out there.

With this background, let us now look at all that is wrong with the fund scheme.

#1 Performance

See the performance comparison chart below along with peers and benchmark.

HDFC Mutual Fund - large cap fund

The fund has underperformed not just its category but also its own benchmark (Nifty 50)  not just in 1 year but even in 3 years. Wow!

Not just that, look at the best and worst performance of the fund. It has failed to protect its downside too.

HDFC Large cap fund - best and worst performance

The figures are for the direct plan of the scheme.

Now, this performance is a rare feat and I am not sure what effort must have taken the fund managers to achieve this.

Here’s something more interesting. Even the index funds offered by HDFC Mutual Fund have beaten their respective indices, Nifty and Sensex. Usually, the index fund returns fall short of the benchmark returns due to tracking error.

The index funds did it but not the HDFC Large Cap fund. This one will go to create its own special place in mutual fund history.

#2 Expenses

Now this is a big one, literally.

So, while this performance lag continues, the fund continues to charge highest expenses to the fund. The last reported expense ratio of the fund’s direct plan is 2.06% and for the regular plan is 2.21%.

In comparison, the expense ratio of HDFC Growth Fund – Direct Plan, another large cap fund from HDFC MF, is just 1.65%.

From the category, the expense ratio of ICICI Pru Focused Bluechip is 1.15% and that of Franklin Bluechip is 1.39% (both for direct plans).

What gives an underperforming fund the right to charge top notch expense when it fails to deliver consistently? 

Why is the small, retail investor made to pay such fees for a fund which is failing so badly?

What has this small, retail investor done to deserve this?

In the interest of investors, a simple decision that HDFC Mutual Fund should have taken is to give up on its fund management fee. It didn’t deserve the fee as it failed in the most basic objective of running an actively managed mutual fund. An actively managed fund gets paid to deliver better returns than a passively managed index fund.

Going a step further, it could have informed the investors in the fund to reconsider their investment and switch to another fund or take their money away. This one is a reasonable expectation, isn’t it?

The End

Is this sheer negligence or this is this arrogance creeping in the BIG fund house?

You see, the HDFC Large Cap fund is just Rs. 1200 crore from over 1.75 lac crores of HDFC Mutual Fund’s total assets under management, a mere 0.6857% of its total funds under management.

Now, it is highly likely that this fund will be secretly buried or merged with another ‘well-performing’ fund. The fund house will do it on its own or on SEBI’s whip.

As time passes, investors will forget this “small fund” from a “big fund house”. The fund house gets to use its super survivors and flaunt to the investors its “God-like” status.

The mortals, the small, retail investor, only gets to fold hands, look up and pray.

HDFC Mutual Fund – Lead the way! Your investors expect a much better deal from you. 

15 thoughts on “HDFC Mutual Fund – Is this what investors expect?”

  1. We have lot of better funds in market than these HDFC underperforming funds!

    Always go for consistent performing funds which don’t fluctuate too much during bare phases compared to its benchmark and its peers.

    If a fund is generating higher alpha compared to its peers for lower standard deviation and beta, then, why select funds with higher volatility.

    It is observed that HDFC funds tend to underform once their AUM reaches sky high.

    Agree with Vipin on this post.

    Regards,

    Bhaskar Nimmala

  2. Thanks for sharing your knowledge on mutual funds Vipin. It helps a lot to all the new investors who have just steped into the world of MF. I am 2 days old into the world of MF. I have few specific questions which may not be particular to this post:

    1) Just so to cut the high expense ratio, is it advisable for a new investor to go for DIRECT plans without having much of the knowledge on markets and MF?

    2) Also, I had invested in the ELSS scheme and want to invest in it for just 3 yrs to meet some specific goals after 3 years. So is it advisable to invest in the fund for just 3 yrs or the MF are meant for long term only?

    3) I am having a lumpsum amount of Rs 1 Lakh. Is it advisable to invest such amount at one go or to go for STP given current market conditions?

    Thank You again for all your good work. Waiting for your reply

  3. Vipin,
    Prashant Jain gets paid substantially more than any other fund manager in this country and hence their fund expense ratios doesn’t surprise me. The move by SEBI to make the fund houses declare the salaries of their managers is a good one. When fund houses become large and managers become redundant but not willing to let them go, they do not want to merge funds. Its a shame they call HDFC Large cap fund as an ‘actively’ managed fund given its poor performance
    At this point of time, HDFC Mid Cap Opportunities fund is the only pure equity fund from HDFC which is performing well. It doesn’t surprise me that ICICI Pru AMC has overtaken HDFC AMC as the largest in India.
    I think the Reliance funds are also struggling, not sure whats going on with them.
    Kotak and Franklin funds offer the best deal in terms of performance, expense ratios, etc.

  4. I have not experianced any push so far from HDFC AMC to promote or push HDFC large cap fund.

    I am an IFA&HDFC amc always guides us to suggest schemes as per risk profile&goals set by investors.
    Nobody forces us to bring business insuch schemes.
    So its upto advisers&investors ….

  5. good analysis Vipin. its not only this fund but even the “God” like funds which have missed the rallies and delivered gross underperformance in many periods. using the bank muscle however, the fund continues to grow.

  6. Very rarely I have seen somebody taking cudgel against a really very giant institution called HDFC Group.
    HDFC Large Cap Fund has not only failed to protect its downside, -21.29% vs -21% or even meeting the benchmarks during upside, 47.80% vs 51.92%. It has performed poorly for 1 year at third place from the list of 11 funds given above, but, also the lowest in 3 years period category. Further the performance has been consistently lower against benchmark NIFTY 50.
    I also further agree that scheme names are confusing having nearly same mandate with some times same benchmark index also.
    In their liquid fund category, their NAV increases by 0.02% every day consistently for years together (making it 7.3% yearly return). How it can happen. All other liquid funds would have roughly 7 to 8.5% yearly return but not 0.02% every day consistently. How can you manage to park / invest your liquid fund money at the same rate to all set of investors at the same rate of return and that too consistently. ICICI Pru liquid fund gives consistently more return and of course the return varies from day to day and not the same 0.02% every day.
    There is some thing terribly wrong at their end.
    As a very large and of course the most respected fund house and the institution, they must have more transparent, fairer and investor friendly practices at their end.

    • I note your point on the liquid fund NAV. Indeed surprising!
      0.02% increase every day does sound fishy. What they are doing is expectation management by showing the stability or zero volatility. Need to deep dive into this as well.

      Thanks for sharing and the comment.

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