HDFC Developed World Indexes Funds of Funds NFO Review: Should You Invest? MoneyWorks4me

HDFC developed world indexes FoF NFO details:

Name: HDFC Developed World Indexes Fund of Funds

Benchmark: MSCI World Index (Net Total Return Index)

Fund manager: mr. Krishan Kumar Daga

Minimum application: €5,000 and multiples of Re. 10

Exit Loading: 1% if redeemed within 30 days from the date of allotment; NIL afterwards

Option: Grow option only

Cost ratio: Regular subscription 1%; Direct subscription 0.5%

Indian investors now have an opportunity to invest in developed markets. HDFC AMC has launched the Developed World Indexes Fund of Funds and the NFO is open for subscription from September 17the until October 1NS 2021.

About the HDFC Developed World Indexes Fund of Funds

Index funds invest in leading stocks based on size and liquidity. While there are mutual funds that invest in global markets, HDFC Developed World Indexes Fund of Funds (HDFC DWI FOF) is a passively managed diversified index fund that invests in units/shares of foreign index funds and/or ETFs that in aggregate correspond to the MSCI World Index (subject to tracking error).

Portfolio features

The FoF (Fund of Funds) will closely match the MSCI World Index in aggregate (subject to tracking error). The MSCI World Index has over 1,500 components and focuses on acquiring large- and mid-cap representation in 23 developed markets, covering approximately 85% of the free float-adjusted market capitalization in each country.

MSCI World Index - Country Mapping

sector and weighting in index

Therefore, this FoF will provide exposure to 5 regions in 23 developed countries, 1500+ components and 14 currencies covering 56% of global GDP and 50% of global market capitalization in a single fund.

Following is the proposed asset allocation of the plan:

types of instruments

Among the index funds/ ETFs, the proposed Index Funds/ETFs under the scheme are as follows:

foreign index fund

The Scheme will invest in units/shares of foreign index funds and/or ETFs (such as the aforementioned names) offered by Credit Suisse Asset Management, which operates as an asset manager.

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Opinion of MoneyWorks4me

Diversification outside the country and specially developed markets are very beneficial in the long run. Not only does it lower portfolio volatility, but it also yields returns very close to Indian stocks before tax.

1. Developed markets tend to have a better business environment, more innovation and governance

The United States, Europe and Canada have mature companies of very high quality with stable profitability, shareholder-friendly management and transparent dividend policies.

The United States is a fertile ground for multi-dredging opportunities from innovative companies and multinational organizations.

2. MSCI World Index dominated by US and European stocks is less volatile relative to convenient/Indian markets

cagr returns

The above data shows that the annual volatility of the MSCI World Index is less than the volatility of Nifty, measured in USD for the apples-to-apples comparison, across all time frames.

Annual volatility explains the range of returns. For example, if MSCI World and India both have an average annual return of 11%, 13% annual volatility in MSCI World implies returns of -15% to 37% in most periods of a year, while 18% for India has a range of -25% to 47% return in most periods of a year. Because the range of Indian returns is wider than MSCI World’s, Indian markets are more volatile. Adding stocks from the MSCI World/Developed Markets can reduce the volatility of the stock portfolio.

3. Adding the benefit of currency depreciation of Indian Rupee vs Dollar/Euro, returns are very close to India’s stock returns

cagr returns %

handy 50 index

Over the past 30 years since LPG reforms in India, India and the US have delivered similar returns, including currency advantage. VS is the largest component in HDFC DWI FOF and is therefore used for comparison.

4. Developed markets are less correlated with Indian equity markets in the medium to long term, even if they show a similar movement in the short term

msci world index

MSCI World Index (mainly developed markets) has a correlation of only 0.4 with Nifty over the medium to long term. This means that if the Nifty rises by 1%, the MSCI World Index rises by 0.4% and if the Nifty falls by 1%, the MSCI World Index falls by 0.4%

In the very short term, such as 1 month-6 months, the correlation is higher, but in the longer term, such as 3-10 years, it has a lower correlation, which reduces the volatility of the entire portfolio.

Other features of HDFC DWI FOF:

  • Developed countries are more efficient markets causing index funds to rank higher than actively managed funds; HDFC DWI FOF only includes index funds that replicate market returns.
  • Index funds also mean lower costs; by investing in HDFC DWI FOF you gain exposure to global markets with just 0.5% pa
  • Until the time India remains a developing country, it will have more inflation and also be a net importer of capital. This will cause the Indian rupee to depreciate against developed market currencies, especially the US dollar. This further contributes to the overall return.

Frequently Asked Questions:

1. Is it the Right Time to Invest in International Funds or HDFC Developed World Indices Fund of Funds?

New, go for SIP!

Global equity valuations have been elevated on the back of lower interest rate scenarios and the current fiscal stimulus around the world to recover from the Covid slowdown.

taxation

If you plan to invest for 10-15 years, the current valuation is less important, but the short-term returns may be lower than the long-term average.

To avoid short-term disappointment, it is appropriate to take a diversified approach to international investment, especially in funds with high exposure to the US. Since HDFC DWI FOF has ~70% in US equities, one can take the SIP route to invest in this fund once it is launched. Currently, the fund house only accepts Lumpsum within the NFO window.

2. Which is better option, Motilal Oswal S&P 500 Index Fund or HDFC Developed World Indexes FOF?

Both funds are (a) low cost, (b) index funds and (c) developed markets investing. However, HDFC DWI FOF includes Europe, Canada, Japan, etc., which allows for more diversification.

S&P 500, a US index, has better prospects thanks to its innovative culture, corporate policy making, etc. S&P 500 companies have a large percentage of non-US revenue, making the S&P 500 a global index. So we advise you to be indifferent to any of the funds. S&P500 is preferred for the reasons mentioned above.

3. Which is better option, Motilal Oswal Nasdaq 100 ETF/FOF Fund or HDFC Developed World Indexes FOF?

Both funds are (a) low cost, (b) index funds and (c) developed markets investing. However, HDFC DWI FOF includes Europe, Canada, Japan, etc., as well as all sectors, while Nasdaq 100 mainly includes technology and new age companies.

We would avoid Nasdaq 100 ETF/FOF because it can be very volatile and returns can differ greatly from broad indices such as S&P500 or HDFC DWI FOF.

Over 10 years from 1990-2000, Nasdaq 100 rose 2000%, while S&P500 rose 370%.

Over 10 years from 2000-2010, the Nasdaq 100 fell -36%, while the S&P 500 fell -10%. Due to unpredictable performance, we recommend avoiding narrow indices such as Nasdaq 100.

How are international funds or funds of funds taxed in India?

Investing in international funds of Fund of Funds is classified as a debt fund under income tax rules, so HDFC DWI FOF will also be taxed as a debt fund. Debt funds are taxed according to your tax bracket if sold within 3 years, and 15% after 3 years or 20% with indexation.


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