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HDFC Asset Allocator Fund of Funds NFO review: Should you invest?

The scheme will decide the allocation to equity, debt and gold based on an in-house back-tested model

April 15, 2021 / 12:20 PM IST

HDFC mutual fund rolling out a new scheme on April 16. It’s called the HDFC Asset Allocator Fund of Funds (HAF).

What is the fund all about?

HAF aims to invest in a set of equity and debt schemes, as well as a gold exchange-traded fund (ETF). The mix is managed depending on the prospects of the underlying asset classes.

Using an in-house model that incorporates various valuation parameters such as the Price-Equity (PE) and Price-to-Book ratios, allocation to equity, debt and gold would be decided. It will invest 40-80 percent in equity, 10-50 percent in debt and 10-30 percent in gold.

The scheme will consider most of its diversified equity funds as its core allocation (80-100 percent of its equity allocation). It may invest a small part of its overall equity portion in thematic schemes; a banking fund, for example. Similarly, on the debt side, the core allocation will go to short-duration schemes.


The scheme appears similar to its other offering, HDFC Multi-Asset Fund (HMAF), which also invests across equity, debt and gold. But there are subtle differences. HMAF invests directly in securities. But HAF takes the FoF route. HMAF will be taxed as an equity fund, because it invests directly in securities and maintains its equity allocation at a minimum of 65 percent of the overall corpus. But HAF is a FoF; these are taxed as debt funds, unless they invest entirely in ETFs.

What works

HAF does the asset allocation for you. Most financial planners say that a significant chunk of your returns are made from asset allocation rather than scheme selection. That’s because asset performance varies over different periods of time.

The back-tested model would be used for asset allocation. “Our model first studies the equity market and decides an appropriate equity allocation. Then, comes our allocation to gold, depending on the real interest rates (interest rates less inflation). Whatever remains will then get invested in fixed income,” says Amit Ganatra, Senior Fund Manager, HDFC AMC. Ganatra manages five other schemes, in addition to HAF’s equity component. Anil Bamboli, Senior Fund Manager-Fixed Income, will manage the scheme’s debt portion.

When you switch between different schemes, you may incur capital gains tax. As FoF is a mutual fund, such tax is not applicable on rebalancing its portfolio.

What doesn’t

A truly objective FoF works best if the fund manager invests the money across fund houses and chooses the underlying schemes, as objectively as possible. Although Ganatra says that the schemes can invest in other fund houses, the offer document also gives a long list of in-house schemesthat would presumably considered first.

There’s nothing wrong in it, but given the lukewarm performance of HDFC MF’s own equity schemes in recent years (excluding the last one-year’s strong comeback), it may help to broaden the investment universe.

Moneycontrol’s take

A standardised model to decide the allocation among different assets helps in the long run. The scheme can steer away from its model in an extreme black swan event.

There are roughly 20 asset allocator funds out there. Some fund houses have two variants: one that invests in directly in stocks and bonds, and the other that goes through the FoF route. By rolling out this scheme, HDFC AMC will also have both the variants. Ganatra says that both serve different purposes.

An asset allocation strategy should ideally be a portfolio approach. But given the volatility and market uncertainty, you can allocate a small portion to asset allocator FOFs. Have a time horizon of at least five years while investing in such funds. The NFO closes on April 30.
Kayezad E Adajania heads the personal finance bureau at Moneycontrol. He has been covering mutual funds and personal finance for the past two decades, having worked in Mint and Outlook Money magazine. Kayezad was the founding member of Mint’s personal finance team when it was set up in 2009.
first published: Apr 15, 2021 12:20 pm

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