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HDFC Mutual Fund launches Asset Allocator FoF

We speak with Amit B Ganatra, Senior Fund Manager, HDFC Asset Management Company Limited, about the firm's upcoming asset-allocator fund and who should invest in it

HDFC Mutual Fund launches Asset Allocator FoF

HDFC Mutual Fund has launched HDFC Asset Allocator Fund of Funds. This open-end fund will invest in the equity, debt and gold schemes of the AMC. The new fund offer (NFO) opened up for subscription on April 16, 2021, and will close on April 30, 2021. Here are the five things that you need to know about the fund.

Tell us a bit about the model which you would deploy to determine the asset allocation between equity, debt and gold. What are the key parameters at play and how do they help in arriving at an optimum asset allocation?
HDFC Asset Allocator Fund of Funds is a fund of fund scheme that aims to generate capital appreciation by managing the asset allocation between equity-oriented, debt-oriented and gold ETF schemes.

Allocation to equity will be based on a financial model. The model considers various valuation parameters which include 1) Twelve-months trailing P/E, 2) One-year forward P/E, 3) Twelve-months trailing P/B 4) Earnings yield/G-sec yield.

Further allocation of assets within equity will be based on the extension of the financial model which will indicate the allocation to mid-cap & small-cap mutual fund schemes. This model also considers valuation parameters which include 1) TTM P/E, 2) One-year forward P/E.

The allocation to gold will be based on factors such as global interest rates and economic cycles and the balance allocation will be made to debt.

What are the key parameters you'd use to select funds that become a part of the portfolio, both on equity and the debt side?
For exposure to equity-oriented schemes, the fund will generally allocate its assets between base allocation (75-100 per cent) and tactical allocation (0-25 per cent). The base allocation will include the four categories - large cap, mid cap, small cap and flexi cap - of mutual fund schemes and tactical allocation will include all the other categories of equity mutual fund schemes. Allocation amongst the base allocation schemes will be guided by the financial model.

For exposure to debt-oriented schemes, the fund will generally allocate its assets between duration-based allocation (75-100 per cent) and sectoral/thematic allocation (0-25 per cent). The duration-based allocation will include the following categories of debt schemes - overnight, liquid, ultra-short, low-duration, short-duration, medium-duration and medium-to-long-duration. The sectoral/thematic allocation will include the other categories of debt mutual fund schemes.

How will the debt component of the fund be managed in terms of credit quality and duration?
The debt component of the portfolio aims to play the role of reducing volatility while generating reasonable returns. Therefore, the debt strategy of the proposed HDFC Asset Allocator Fund of Funds will focus on investing predominantly in schemes with exposure, mostly to issuers with high credit quality and controlled interest rate risk. Generally, the debt portfolio duration would be in the range of one to three years. However, in case the interest rates are very low or very high in the judgement of the fund manager, then the duration may be beyond this range.

How will this fund be different from the HDFC Multi Asset Fund in terms of risk-reward outcomes? The latter also invests in equity, debt and gold even though it is not an FoF?
HDFC Multi Asset Fund invests directly into equity, debt instruments and gold ETF, whereas HDFC Asset Allocator Fund of Funds, being a FOF scheme, will invest in the existing funds from different categories of equity-oriented and debt-oriented schemes and in gold ETF. Therefore, the equity and debt exposure in case of HDFC Asset Allocator Fund of Funds will be more diversified.

Who is the ideal investor for this fund?
The fund is suitable for investors looking for a diversified portfolio across asset classes with an objective to generate capital appreciation over the long term, i.e., having a minimum investment horizon of three years. However, this is subject to the asset allocation requirements of each such investor. The fund aims to follow a systematic and process-driven approach to asset allocation with the help of a financial model based on valuation parameters. Even within equity and debt, the fund will invest in schemes across different categories. With investment in the fund, the investor can benefit from a diverse investment approach.

The investor could also avail indexation benefit as the fund will be classified as a debt-oriented scheme for taxation purposes.

Note: Investors in the scheme shall bear the recurring expenses of the scheme in addition to the expenses of other schemes in which the Fund of Funds scheme makes an investment (subject to regulatory limits). For complete risk factors and scheme details, refer Scheme Information Document (SID). Click to view the presentation.