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HDFC Housing Opportunities Fund - Series 1: Should You Invest? - Outside View by PersonalFN
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HDFC Housing Opportunities Fund - Series 1: Should You Invest?
Nov 24, 2017

NFO Summary

Type: Close-ended Thematic Equity Scheme

Min. investment: Rs 5000/- & in multiples of Rs 10 thereafter per application under the scheme during the NFO Period

Face value: Rs 10 per unit

Benchmark Index: India Housing & Allied Businesses Index

Plans:

  • - Regular Plan
  • - Direct Plan

Options under each plan

  • - Growth*
  • - Dividend Pay-out

*Default option

Entry load: Not Applicable

Exit load: Not Applicable

Expense Ratio: Up to 3% (including additional expenses)

Issue opens: November 16, 2017

Issue closes: November 30, 2017

Maturity Date / Final Redemption Date* - 1140 days from the date of allotment

Investment Objective*

To provide long-term capital appreciation by investing predominantly in equity and equity related instruments of entities engaged in and/or expected to benefit from the growth in housing and its allied business activities.

But, there is no assurance that the investment objective of the Scheme will be realized.

*Source: Scheme Information Document

Is this fund for you?

HDFC Housing Opportunities Fund (HHOF) is a close ended Thematic Equity Scheme from the stable of HDFC Mutual Fund. Being a close-ended fund your funds would be locked in it for 1140 days from the day of subscription. Further, 3 plans are proposed to be listed soon under this scheme and this is the 1st plan being launched of the 3-series.

Thematic Funds invest in stocks from one particular common theme. They are growth-oriented equity schemes that aim at capital appreciation by investing in a set of say 3-4 sectors that are closely related to one particular theme. For example, funds like infrastructure funds will invest in equities of construction companies, cement companies, steel companies and other companies related to infrastructure.

The Indian economy has been one of the fastest growing economies in the world. And in order to sustain high growth figures, robust infrastructure is imperative to remove the supply side bottlenecks. Due to various reformative measures taken by the Government, this sector is expected to perform well in coming few years.

HHOF fund is mandated to invest up to 100% of its net assets in equity stocks of businesses in housing and allied activities with no market capitalisation bias. It also aims to take advantage international investment opportunities available at any given point of time.

HHOF is suitable for investors with high-risk appetite- meaning those who can assume high risk in an anticipation of high returns in future. However, having an investment horizon of 5 years is essential.

How will the fund allocate its assets?

The asset allocation under normal circumstances will be as under:

Instruments Indicative allocations Risk Profile
(% of total assets) High/Medium/Low
Minimum Maximum
Equity and Equity Related Instruments of entities in Housing and its Allied Business activities 80 100 High
Equity and Equity Related Instruments of entities other than in Housing and its Allied Business activities^ 0 20 High
Debt and Money Market Instruments* 0 20 Low to Medium
Units issued by REITs 0% 10% Medium & InvITs 0 10 Medium to High

*Source: Scheme Information Document
*Investment in securitized debt, if undertaken, shall not exceed 20% of net assets of the Plan under the Scheme.
^The Plan under the Scheme intends to seek investment opportunity in the ADR / GDR / Foreign equity and debt securities, in accordance with guidelines stipulated in this regard by SEBI and RBI from time to time.

Further it is stated in the offer document that:

  • The Plan shall not have an exposure of more than 20% of its assets in ADRs/ GDRs and foreign securities (including mutual funds and other approved instruments.
  • The Plan under the Scheme may invest in equity derivatives up to a maximum of 50% of the net assets allocated towards equities subject to a maximum of 30% towards other than Housing and its Allied Business activities.
  • The Plan(s) under the Scheme may also invest up to a maximum of 20% of its net assets in debt derivatives.
  • The total exposure related to option premium paid shall not exceed 20% of the net assets of the Plan(s) under the Scheme.
  • The Plan shall not undertake repo/reverse repo transactions in Corporate Debt Securities; Credit Default Swap and Short Selling.

What investment strategy will the fund follow?

Being a thematic fund, HDFC Housing Opportunities Fund will look for opportunities available at any given point of time in housing sector. It will primarily be managed as a "Housing Thematic Scheme".

Investment Strategy for Equity

HHOF in an endeavour to generate capital appreciation for its investors by investing in entities involved in or expected to benefit out of the demand of housing in India. The scheme will invest primarily in equity and equity related instruments of entities that are likely to be beneficiaries from growth in housing and its allied business activities. The called list of business activities considered under the 'Housing Theme" will generally include:

  • Real Estate developers
  • Financial Services providing housing finance
  • Allied business activities such as:
    • Construction
    • Cement & Cement product such as concrete, aggregates, bricks, etc.
    • Chemical will include paints, adhesives, water-proofing chemicals, etc.
    • Metals will include iron & steel, aluminium, copper, zinc, etc.
    • Consumer durables will include home appliances, electronic items, furniture & fixtures, etc.
    • Additionally, building products will include glass, roofing, siding, lumber, plywood, insulation, wallboard, windows, doors, cabinets, countertops, HVAC, piping, plumbing fixtures/fittings, flooring, electrical products and many other products.
    • Any other business activity which the fund manager thinks to be allied to the housing theme.

The fund will diversify its holding across the housing sector theme from a large number of sectors to select stock. Further the fund manager would aim to build portfolio of entities within these sectors which have competitive advantage over the other within their respective industries.

Investment Strategy for Debt & Money Market Instruments

The Plan(s) under the Scheme will retain the flexibility to invest in the entire range of debt instruments and money market instruments. Investment in Debt securities (including securitized debt) and Money Market Instruments will be as per the limits i.e. in the range of 0% - 20% of its net assets.

Every investment opportunity in Debt and Money Market Instruments would be assessed with regard to credit risk, interest rate risk, liquidity risk, derivatives risk and concentration risk.

Investment Strategy for REITs and InvITs

The real estate and the infrastructure sectors are deeply linked to the economic performance and hence likely to be major beneficiaries in the expected Indian economic growth. Thus, the Plan(s) under the Scheme may also invest in the hybrid securities viz. units of REITs and InvITs for diversification and subject to necessary stipulations by SEBI from time to time.

Investment Allocation for Foreign Securities

The Plan under the Scheme may also invest in suitable investment avenues in overseas financial markets for diversification, as per the scheme objective and subject to necessary stipulations by SEBI / RBI. Towards this end, the Mutual Fund may also appoint overseas investment advisors and other service providers, as and when permissible under the regulations.

Fund Manager Profile

The fund will be jointly managed by Mr. Srinivas Rao Ravuri and Mr Rakesh Vyas

Mr Srinivas Rao Ravuri collectively has over 22 years of experience in Indian financial markets, equity research and Fund Management. He has been associated with HDFC Mutual Fund for over a decade since October 2004. He is a MBA in Finance and graduate in Commerce (B. Com). Prior to joining HDFC AMC he was associated with Motilal Oswal Securities Ltd., and Edelweiss Capital Ltd.

Other funds currently managed by him are: HDFC Growth Fund, HDFC Infrastructure Fund, HDFC Focused Equity Fund and HDFC Equity Opportunities Fund - Series 2

Mr Rakesh Vyas is dedicated Fund Manager for Overseas Investments. He collectively has over 14 years of experience of which 3 years in Application Engineering (Control & Automation) and 11 years in equity research. He is a B.E (Electrical) and PGDM from XLRI, Jamshedpur. Prior to joining HDFC AMC he was associated with Nomura Financial Advisory and Securities Pvt. Ltd, Lehman Brothers Services India Pvt. Ltd, GE Power Controls India Pvt. Ltd. and Larsen & Toubro Limited.

He largely manages the overseas investments at HDFC fund house. And some of the funds currently managed by him are HDFC Arbitrage Fund, HDFC Balanced Fund, HDFC Banking and PSU Debt Fund and more.

Fund Outlook

Being a thematic fund HHOF with assume high risk. Fund outlook would be hinged on economic growth and demand in the housing sector in coming future.

The fund theme assumes with the Government's focus to provide 'Housing for All' by 2022 coupled with lower interest rates is likely to boost housing demand in India. Further, the Government initiatives and fiscal incentives towards affordable housing and measures announced in the Union Budget 2017 is likely to provide a fillip to the housing sector. This will also improve demand for industries that are linked to the housing sector such as cement, steel, banks, etc.

On evaluating the fund's investment strategy, HHOF might have up to 100% exposure to equity and equity related instruments of housing and allied businesses. Hence, the future returns would be dependent on how well the housing sector performs.

Real estate as an investment instrument is slowly losing its sheen. The demand for same is dwindling. However, with changing demographics, 66% of India's population is under 35 years of age and hence anticipation of large demand for housing is normal. Further with rising disposable income and falling interest rates make purchase of your dream home even more possible. The biggest change in the real estate is that it is now regulated through RERA which will bring greater transparency and formalisation of this sector.

Developers have been sitting tight on the inventory, but they are unnerved. They are trying to solicit customers by offering discounts and giving away 'assured gifts' to new buyers. Nonetheless, they have managed to keep the housing prices very high. Many of them are heavily indebted and may find it difficult to run the show, but they can't afford to slash prices aggressively, or else, they will have to settle for lower realizations for a protracted time period.

Further, NFOs are currently being launched at a time when mutual fund houses are expected to merge similar schemes. But it seems they have figured loopholes in the current regulations to keep their NFO factories alive and running at their optimal capacity. Like always, fund houses are offering high incentives to distributors to persuade investors to invest in NFOs.

Recently, the Securities and Exchange Board of India (SEBI) released guidelines on mutual fund classification. The move was intended to rationalise the product bouquet of the mutual fund industry and bring discipline in the approach of all industry players.

And mutual fund houses try to lure investors into new offerings by launching them at a time when it's easy to convince them about the future returns. More often than not, NFOs don't offer anything new. They just re-bundle ready-made products.

Unless there is a substantial recovery in economic indicators, the market level appears unsustainable. Hence, it would be better to be cautious and not get swayed by exuberance.

On macro-economic factors, Moody's, an international rating agency, has upgraded India's local and foreign currency issuer ratings to Baa2 (with stable outlook) from Baa3 (with a positive outlook). While this will add to positive sentiments, the adverse undercurrents remain, mainly: flagging economic growth, rising crude oil prices, inflationary concerns (which could preclude RBI from reducing rates), widening trade deficit, vulnerable rupee, rising bond yields, and potential fiscal slippages.

Moreover, there's discontent post-demonetisation and after shoddy implementation of GST. We fear that Rs 6.92 lakh crore road plan (BharatMala Pariyojana to construct 34,800 km of highways) plus Rs 2.11 lakh crore for bank recapitalization (attempted at reinvigorate economic growth) could result in fiscal slippages, given the mammoth of expenditure.

Global cues - The US-North Korea geopolitical tensions, rising international oil prices, possibility normalisation of interest rates by Federal Reserve; are factors that pose a risk for the Indian capital market.

Hence, in the aforesaid scenario, the performance of the fund will be closely linked to how astutely the fund manager constructs its portfolio amidst time when valuations too seem grossly stretched.

Hence, HDFC Housing Opportunities Fund is expected to carry high risk while achieving its investment objective.

If you are unsure about which mutual fund schemes to invest in may try PersonalFN's unbiased mutual fund research services.

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This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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