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HDFC AMC changes asset allocation of retirement fund; what should you do?

The fund house will keep net equity exposure in the scheme in the range of 5-30 percent but use spot-future arbitrage to maintain the gross equity allocation above 35 percent.

October 11, 2023 / 12:43 AM IST
Mutual Funds

Mutual Funds

HDFC Mutual Fund has announced its decision to change the asset allocation of the HDFC Retirement Savings Fund - Hybrid Debt Plan (HRSF) to boost the scheme's returns and make it tax efficient. The MF has decided to tinker with the allocation to equities through derivatives. Since this is a change in the fundamental attribute of the scheme, an exit option is also announced. Here is what you should know.

What is changing?

HRSF is a debt oriented scheme allocating 70 to 95 percent of the money to fixed income. Equity and equity related instruments have an allocation of 5-30 percent. The fund house has proposed that going forward the equity and equity related instruments will be 10-45 percent, out of which net equity exposure will be in the range of 5-30 percent. Put simply, the scheme’s allocation to unhedged stocks will remain capped at 30 percent, but with the use of spot-future arbitrage the scheme is expected to maintain the gross equity allocation above 35 percent.

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Accordingly, the allocation to debt will be curtailed to 55-90 percent of the scheme’s money.

HRSF has given 8.81 percent returns in the last three years ended September 29, 2023, compared to 8.86 percent given by conservative hybrid funds, as per Value Research. The scheme is managed by Srinivasan Ramamurthy and Shobhit Mehrotra.

Why the change?

“Increasing exposure in equities will give a boost to returns and at the same time exposure to derivatives will aid in mitigating the volatility risk arising out of fluctuations in interest rates by increasing equity and hedging the same. This approach essentially limits the exposure to pure equity and equity related instruments in the original range while managing associated risks,” said the fund house in the notice sent to the unitholders.

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The change has also been done to ensure that the returns generated by the scheme become tax-efficient. The scheme has been allocating up to 30 percent to stocks. As per the new tax rules post Union Budget 2023, a scheme that invests less than 35 percent of the money in stocks is considered a debt fund and the gains are taxed as per slab rate. A scheme that invests between 35 percent to 65 percent of the money in stocks, however, is eligible for indexation benefit.

“By introducing the use of arbitrage to enhance the gross equity allocation above 35 percent, the fund house has effectively made the scheme eligible for indexation benefit. But the net exposure still is capped at 30 percent which means the risk level of the scheme does not change,” says Shalab Gupta Bibhab, Founder of Bibhab Capital, a mutual fund distribution firm.

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This change ensures that the returns generated by the scheme are taxed at 20 percent post indexation if the units are held for more than three years, leaving a lot more in the hands of the investors compared to taxation at the slab rate.

Exit option

Though the change appears to be in favour of investors, the fund house has to offer an exit option to the investors, as the change in asset allocation is a change of fundamentals attribute. Mutual fund norms make it mandatory for the fund house to offer such an exit option. An exit window to the unitholders of 30 days from September 29, 2023, to October 30, 2023, is given by the fund house. The proposed change in the asset allocation will be effective from October 31, 2023.

What should you do?

This exit option is optional and investors who are comfortable with the change in asset allocation need not do anything.

“Investors with moderate risk profiles will find this scheme useful as it can help them save for their retirement. Lock-in of five years or till the investor reaches 60 years of age, whichever is earlier, helps investors to remain invested even in volatile phases in equities and fund managers do not get pressurised by redemption pressures thereby potentially improving the investor experience,” says Bibhab.

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Abhay Mathure, a Mumbai based mutual fund distributor, recommends using higher allocation to equities while funding retirement for younger investors. “HRSF may suit moderate risk investors. However, in most cases where retirement is years away and the scheme has a lock-in, it makes sense to invest in schemes that allocate most of the money to stocks to ensure compounding driven creation of wealth.”

Schemes with high allocation to stocks tend to offer higher returns than those with low allocation to stocks, of course, with higher volatility.

To know more about the investment ascent in India with the nation’s leading financial pioneers, tune in to the Moneycontrol Mutual Fund Summit, 11th October 2023 in Mumbai, 3.50 pm onwards. Log on here for further details.

Powered by Axis Mutual Fund, Strategic Partner Reliance Industries Limited, Associate Partners HSBC Mutual Fund, Motilal Oswal MF, 360 ONE Mutual Fund, IBM and Baroda BNP Paribas.

Nikhil Walavalkar

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