HDFC Developed World Indexes Fund of Fund – What & Why?

Driven by the need to diversify portfolio with the purpose of managing the risks associated with equity market investments, portfolio advisors have been looking at newer asset classes and markets that we may not correlate like NFT, Non-Fungible Token, investments into funds with exposure in foreign markets etc are gaining traction.

In the series of such funds, we had a recent NFO by HDFC AMC, HDFC Developed World Indexes FoF , a passively managed fund of fund that invested into Index Funds and /or ETFs of developed markets, thus providing access to some of the best companies around the world.

This FoF will provide exposure to 5 regions across 23 developed markets countries, 1500+ constituents, and 14 currencies with coverage of 56% of global GDP and 50% of world market cap in one single fund.

Asset Allocation is as below-:

Information Technology – 22.80 %
Financials -13.40 %
Healthcare- 12.80 %
Consumer Discretionary- 11.75 %
Industrials- 10.45%
Communication Services- 9.27%

So, what’s good about it?

Let’s just list a few positives:
1. It gives investors exposure to 23 developed markets, a far wider diversification that some of the US focused funds, but still having largest exposure to the land of opportunities, US, at 67%, followed by Europe with 19.1% and several others Japan 6.6% Canada 3.3% etc.
2. There is currency diversification, given that exposure is in different geographies.
3. Sector diversification is built in the basic construction of the fund, so that’s also there. HDFC DWI FoF is going to mirror MSCI World Index which has 21% exposure to IT, 13% to financials, 12.9% to healthcare etc. offering a fairly good sector coverage.
4. Not just that, it going to be have exposure to large and mid-size companies, giving almost a 360 degree diversification.
5. Being a passively managed fund, it will have low expense ratio, 0.4 for direct plan.
6. High degree of diversification will also ensure low volatility, with reasonable returns.
7. The fund is expected to be a good option got mid to low risk investors not having any global exposure.

And what about the other side of the coin?

All good things do have some limitations, and its always good to look at both sides of the coin before making a decision, so let’s review the limitations:

1. While on one side diversification is great positive, fund looks to be over diversified, 1500 different scripts, 23 countries etc. may limit the returns. Therefore, one must have moderate return expectation.
2. Other side one needs to be aware that FoF are treated as debt funds for taxation purposes, that means, if held for less that three years, gains will be treated as short term capital gains and taxed at investor’s tax slab rate, and at 20% with indexation if held for more than three years under LTCG.

The opinion
Looking at its positives and somewhat not so positive features, my personal opinion is Global diversification is important when it comes to building your equity portfolio and HDWI FoFs aims to offer just that, and hence it does warrant a look basis risk profile, investment horizon and return expectations.

MSCI World Index has a low co-relation with the Nifty 50, which is what investors need to look for when diversifying their portfolio. So that in my opinion is positive.
While diversification can bring down volatility, over-diversification can weigh down returns. Therefore, anyone looking for aggressive returns may do well by staying away.

The fund is for conservative investors. Due to its excessive diversification, the fund is more likely to give steady but moderate returns.

Hope it helps you may informed decision, and one last opinion, if you are considering investment, SIP may be a better option, since it gives you time to see the performance over some period of time.
Happy investing……