HDFC Mutual Fund (HDFC MF) rolling out a new Developed World Indexes Fund of Funds (HDWI FoFs). It will invest in a combination of an international exchange traded fund (ETF) and index funds – developed by Credit Suisse – in a manner that tracks the returns of the MSCI World Index. This is the first international fund from the HDFC stable.
HDWI FoFs is a passively-managed scheme that will give investors exposure to global markets. The scheme will invest in five global funds that track Europe, Japan, Pacific (ex-Japan), Canada and the US.
The proportion in which the HDFC fund would invest in these global funds would depend on the regional weightages that its benchmark index, MSCI World Index, follows. Typically, other India-based international funds invest your money in one single scheme abroad. HDWI FoFs follows a different approach. Although it will invest across the globe, it would do so by investing in country or region-specific funds, through multiple funds that specialise in those geographies.
Through these five funds, HDWI FoFs will give investors exposure to 23 developed countries.
Unlike a US or a region-focused fund, HDWI FoFs aims to give much wider geographical diversification to investors. Even so, US markets will still have the largest exposure, at 67 percent. Europe will have 19.1 percent weightage. Japan (6.6 percent), Canada (3.3 percent) and other developed markets (excluding Japan, at 3.3 percent) will make up the rest of the portfolio.
Navneet Munot, managing director and chief executive officer of HDFC MF, says the fund gives diversification in the broadest sense.
“There is currency diversification given that the fund will take exposure to several geographies. The fund is also going to be fairly well-diversified in terms of sectors,” he says.
The MSCI World Index has 22 percent exposure to the information technology segment at present, followed by 13 percent exposure to financials and 12.9 percent to healthcare. The remaining exposures are to consumer discretionary (11.9 percent), industrials (10.6 percent), communication services (9.1 percent), consumer staples (7.01 percent) and other sectors.
Munot adds that if earnings growth becomes broad-based over time, this fund could be a good way to capture this growth as it will have exposure to large and mid-sized companies.
Michael Levin, MD, head of asset management, Americas and Asia Pacific, Credit Suisse, says, “At this juncture in global economy and markets, it makes sense to invest in a globally diversified portfolio.”
Financial planners say such a fund is suitable for first-time investors, who don’t have any exposure to international funds. “As this fund’s exposure will be spread across several countries, there is no country-specific risk. For an investor with a conservative risk-profile, this fund makes sense,” says Nishant Agarwal, managing partner and head-family office, ASK Wealth Advisors.
A passively-managed fund is a good way of taking international exposure, as active fund managers have found it difficult to beat market indices in developed markets. The HDWI FoFs is likely to have only 0.4 percent expense ratio for direct plan investors.
The MSCI World Index has shown lower volatility than the Nifty 50 across different time periods. HDFC MF has analysed pertaining to the last 20 years. MSCI World Index (14.3 percent) has also delivered higher returns than Nifty (11.8 percent) over the last five years.
What doesn’t work
Financial planners say that with over 1,500 stocks, the fund seems to be over-diversified.
“While region-specific funds come with higher country risk, there is also potential for getting higher returns from such funds,” says Rupesh Nagda, founder and managing director of Family First Capital.
He adds, saying “Investors getting into this fund should go with moderate return expectations.”
Over the last five years, the MSCI US Broad Market Index has delivered returns of 18 percent, outpacing the world index .
As an FoF investing in overseas funds, the scheme will be treated as a debt fund for taxation purposes. Long-term capital gains (LTCG) tax will be applicable after three years, at 20 percent, with indexation benefit (inflation-adjusted gains).
Short-term (less than three years) capital gains will be taxed at the investor’s tax slab rate.
Global diversification is important when it comes to building your equity portfolio and HDWI FoFs aims to offer just that. MSCI World Index has a low co-relation with the Nifty 50, which is what investors need to look for when diversifying their portfolio.
While diversification can bring down volatility, over-diversification can weigh down returns.
The fund is for extremely conservative investors. Due to its excessive diversification, the fund is more likely to give steady but moderate returns. Investors looking for a less-volatile option can consider deploying a small part of their surplus in HDFWI FoFs. If you are comfortable with handling higher volatility, opt for a US-specific or global fund that comes with a good track record and vintage.The new fund offer (NFO) opens today and will close on October 1, 2021.