HDFC MF to launch its first international fund, tracking MSCI World Index

By Neil Borate
The HDFC Mutual Fund IPO is a pure offer for sale, which will see HDFC and Standard Life sell a total of 25.457 million shares of the company. Photo: Prajakta Patil/Mint

NEW DELHI : HDFC Mutual Fund is all set to launch a Fund of Funds (FoF) tracking the MSCI World Index. The MSCI World Index is a developed markets index covering 23 markets and more than 1,500 companies. The HDFC Developed World Indexes Fund of Funds (FoF) will feed into various Credit Suisse Index Funds and ETFs domiciled in Ireland and Luxembourg. These index funds will collectively track the MSCI World Index. The new fund offer (NFO) for the scheme will run from 17 September to 1 October. Being an open-ended fund, it will be available for purchase and redemption thereafter. The fund will have an expense ratio of 1% for the regular plan and around 0.4% for the direct plan, a person with knowledge of the matter said on condition of anonymity.

The MSCI World Index covers regions accounting for around 56% of the world’s Gross Domestic Product (GDP). It has a 68% exposure to the US, 19% to Europe, 7% to Japan, 3% to Canada and the balance 3% to other developed markets in the Pacific region. It does not, however, invest in emerging markets such as India and China. Sectorally, information technology occupies the highest share in it at 22.5%, followed by financials at 13.3% and healthcare at 12.8%. Companies such as Apple, Amazon and Facebook have a large weightage in it.

Diversification is an important reason for investors to invest outside India. According to the HDFC AMC presentation, the correlation between the MSCI World (in dollar terms) and the Nifty 50 (in rupee terms) over the past 20 years is just 0.38. Valuations for the MSCI World are close to the Nifty 50, the presentation showed. The MSCI World Index has a trailing Price to Earnings (PE) ratio of 29.96 compared with 27.01 for the Nifty 50. However the forward PE of the Nifty is higher at 22.40 compared with 19.79 for the MSCI World. The Price to Book (PB) ratio of the MSCI World at 3.28 is lower than the Nifty 50 at 4.12 implying that the MSCI World Index is cheaper.

The historical returns of the MSCI World and Nifty have also diverged over different time periods. Over the past five years, the MSCI World in dollar terms delivered 14.3% compared with 11.8% on the Nifty 50. However, over a 20-year time frame, the Nifty beat MSCI World with a 13.4% return compared with 7.4% on the MSCI World. Over all time periods, however, the Nifty has had a higher standard deviation than the MSCI World, implying that investing in both indices could reduce the volatility of your portfolio. If you look at daily rolling returns that adjust for different start and end dates, the MSCI World Index has given a return of 10.3% CAGR over the past 10 years in rupee terms. “A fund that tracks multiple developed markets is a good option for Indian investors. At present numerous schemes track just a single market so this new launch will offer better diversification," said Tarun Birani, founder and director, TBNG Capital Advisors Pvt. Ltd.

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