HDFC Nifty Top 20 Equal Weight Index Fund – Direct (G) : NFO Details

A draft scheme information document for the HDFC Nifty Top 20 Equal Weight Index Fund – Direct (G) has been submitted by HDFC Mutual Fund to SEBI. Replicating the Nifty Top 20 Equal Weight Index (TRI) is the goal of this open-ended index fund. Subject to tracking errors, the fund is intended to provide returns that are comparable to the index before fees and expenses. This strategy gives each of the index's 20 stocks identical weight, in contrast to standard index funds that weight equities according to market capitalization. This lowers concentration risk because no single stock has an outsized effect on the portfolio. The fund is set up to offer diversification through exposure to 20 large-cap firms while adhering to a passive investment approach.

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Details of the NFO: HDFC Nifty Top 20 Equal Weight Index Fund – Direct (G)

Investment Objective and Strategy

Objective:

To generate returns that are commensurate (before fees and expenses) with the performance of the Nifty Top 20 Equal Weight Index (TRI), subject to tracking error.

There is no assurance that the investment objective of the Scheme will be achieved.

Investment Strategy:

HDFC Nifty Top 20 Equal Weight Index Fund – Direct (G) will be managed passively with investments in stocks comprising the Underlying Index subject to tracking errors. The investment strategy would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the Scheme. A part of the funds may be invested in debt and money market instruments, to meet liquidity
requirements.

Since the Scheme is index fund, it will only invest in securities constituting the Underlying Index. However, due to corporate action in companies comprising the index, the Scheme may be allocated/allotted securities which are not part of the index. Such holdings would be rebalanced within 7 Calendar Days from the date of allotment / listing of such securities.
As part of the Fund Management process, the Scheme may use derivative instruments such as index futures and options, or any other derivative instruments that are permissible or may be permissible in future under applicable regulations. However, trading in derivatives by the Scheme shall be for restricted purposes as permitted by the regulations.

The above Index has been chosen as the benchmark since the Scheme will invest in stocks which are constituents of Nifty Top 20 Equal Weight Index (TRI). Thus, the aforesaid benchmark is most suited for comparing the performance of the Scheme.
The Trustee reserves right to change the benchmark for performance of the scheme in conformity with the investment objectives and appropriateness of the benchmark subject to SEBI (MF) Regulations, and other prevailing guidelines, if any by suitable notification to the investors to this effect. In accordance with the investment objective and tracking error definition, the Scheme performance will be
compared with the total returns of Nifty Top 20 Equal Weight Index (TRI).

Risk associated with HDFC Nifty Top 20 Equal Weight Index Fund – Direct (G)

As the Scheme proposes to invest not less than 95% of the net assets in the securities of the Underlying Index in the same proportion, the Scheme will not be actively managed. Performance of the Underlying Index will have a direct bearing on the performance of the Scheme. The Scheme may be affected by a general decline in the Indian markets relating to its Underlying Index. The Scheme invests in the
securities included in its Underlying Index regardless of their investment merit. The AMC does not attempt to individually select stocks or to take defensive positions in declining markets. Further, it is pertinent to note that there is no element of research recommendations involved before the execution of trades in the Scheme. The decision of the Fund Manager to execute trades including rebalancing required will be purely driven by the inflows and outflows in the Scheme and composition of the Underlying Index. 

Risk Mitigation Strategies of HDFC Nifty Top 20 Equal Weight Index Fund – Direct (G)

The Scheme aims to track the Nifty Top 20 Equal Weight Index (TRI) before expenses. The index will be tracked on a regular basis and changes to the constituents or their weights, if any, will be replicated in the underlying portfolio with the purpose of minimizing tracking errors. The Scheme being a passive investment carries lesser risk as compared to active fund management. The portfolio would follow the index and therefore the level of stock concentration in the portfolio and its volatility would be the same as that of the index, subject to tracking errors. Thus, there would be no additional element of volatility or stock concentration on account of fund manager decisions. The fund manager would endeavor to keep cash levels at the minimal to control tracking errors. The Risk Mitigation strategy revolves around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Underlying Index as well as the incremental inflows into / redemptions from the Scheme. While these measures are expected to mitigate the above risks to a large extent, there can be no assurance that these risks would be completely eliminated.