HDFC Housing Opportunities Fund – Series I – A diversified proposition?
With equity markets at an all-time high and record in-flows in mutual funds pouring in per month, AMC’s are coming up with innovative schemes to lure the investors. HDFC Asset Management Company has announced the launch of a housing opportunities fund. The scheme for which NFO subscription is currently open is HDFC Housing Opportunities Fund – Series I. The fund is a close-ended thematic equity scheme which intends to invest in opportunities arising out of housing & allied businesses – right from finance to steel, cement to paints or any other building material. So the fund is not a Housing Finance Companies (HFC’s) specific fund but touches businesses across sectors which deals with building a house. The fund is looking to investing in opportunities arising across sectors due to Modi’s government’s “Housing for All by 2022” scheme.
Details about the NFO:
Subscription Date: November 16, 2017, to November 30, 2017
Scheme Type: Closed Ended Thematic Mutual Fund Scheme
Tenure of the Scheme: Tenure is of 1,140 days. The fund will be listed both on NSE and BSE and investors can exit prematurely also or otherwise units of the plan will automatically be redeemed on the maturity date. Capital will be deployed from December 1, 2017, onwards.
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. There is no assurance that the investment objective of the Scheme will be realized.
Investment Strategy: The Fund would endeavor to generate capital appreciation by investing in entities belonging to businesses that are engaged in and/or expected to benefit out of the demand for housing in India. The fund house has positioned fund as a thematic equity offering wherein the focus will be in investing equity component related to housing & allied businesses (80-85%) and Debt & Money Market instruments (15-20%) for managing volatility vis-a-vis equities.
Fund Manager: Mr. Srinivas Rao Ravuri
Exit Load: Not applicable. The Units under the Plan cannot be directly redeemed with the Fund as the Units will
be listed on the stock exchange(s).
Benchmark: India Housing and Allied Businesses Index#
Minimum Application Amount/Number of Units: Purchase: 5,000 and in multiples of 10 thereafter
Housing Sector Outlook:
With growing household income levels, property prices in check and lower interest rates, every family now dreams to own a home. The demand for the affordable housing is primarily for actual buyers and not investors. It is a no-brainer that there is a shortage of affordable houses in India and demand do exist. It should definitely give impetus to the sector as a whole. Till now, developers were focussing on housing for middle to a high-income group but with the demand slowing down in these segments and real estate players acknowledging a phenomenal opportunity in lower ticket size homes in combination with increased government incentives, the focus has now shifted to affordable housing. It is very significant from a country perspective that big chunk of the population belonging to economically weaker sections of the society will now be able to afford a house.
However, as a big an opportunity it is, bigger are the challenges. Greater demand doesn’t mean that sector will have no headwinds. Faster approvals for such projects, greater private sector investments, continued government incentives for developers as well as home buyers and adequate site location where such projects will reside remains a big challenge. Developers are already reeling under heavy debt, the impact of demonetization and GST. Acquisition of land for such projects and maintaining profitability margins for developers remains a difficult task. Greater central and state governments coordination will be required to make sure that the end customer for which such a benefit is intended to, actually owns the house and without any delays. Other risks include reversal of interest rate cycle if inflation begins to inch up, less than expected job creation opportunities leading to limited income growth, execution delays by construction companies due to a variety of reasons.
Why fund focussed on Housing Opportunities?
The fund house has mentioned some of the key points as to why demand for housing is going to sustain going ahead. It includes a shift towards nuclear families, urbanization, favorable demographics, government push for affordable housing in the form of ‘Housing for All’, improved affordability due to lower interest rates, the presence of a Real Estate Regulator now and fiscal incentives in the form of tax incentives/subsidies for buyers/developers. So basically better affordability with stable property prices, rising incomes of households and lower interest rates should be the main drivers for the growth in the sector.
Government’s Affordable Housing Push is also the key factor here. The Modi government push for “Housing for All” has brought the sector to the forefront. Target is to build 5 cr homes* over five years under Pradhan Mantri Awaas Yojana – Urban and Gramin. To realize this there is an action plan to have direct funding from central and state governments along with active private sector participation.
There are series of sectors which gets impacted when you decide to buy a home. Let’s have a look such sectors: Banks, construction companies which build housing projects, engineering majors, home appliance companies, tiles companies, sanitaryware companies, cement, furniture based, electrical appliances, steel, adhesives, and chemicals, paint to name a few. So the fund seems to target a whole big basket of sectors which gives it a lot more flexibility than regular thematic funds.
As always before investing, investors must make them familiar the risks associated with a theme based fund and invest only after consulting their financial advisor concerning the same. There are inherent risks associated with thematic funds and investors must be aware of those.
Few key pointers about the fund:
(a) Diversified theme? – The fund is more of a diversified thematic fund and not necessarily a narrowly focused one – This is definitely a comforting factor. There are series of sectors which gets impacted when you decide to buy a home. Banks, developers, construction companies, engineering majors, home appliance companies, tiles companies, sanitaryware companies, cement, furniture based, electrical appliances, steel, adhesives, and chemicals, paint to name a few. All these sectors should have a weight in the fund and thus portfolio should be well diversified. Don’t forget the debt component of 0-20%.
(b) An indirect beneficiary of the pickup in the economy – Since some of the stocks which the fund will be associated with will be from the economy related sectors such as construction majors, paints, cement, steel to name a few. Any pickup in the broader economy can bring indirect benefit to the fund. Themes such as paints, chemicals & adhesives have done well secularly over the years. Not to forget private and especially public sector or corporate facing banks which should form significant allocation in the portfolio. Pickup in the economy will have a direct correlation with them.
(b) Stretched Valuations? – HFC’s and NBFC’s already have run up in the fast few years giving phenomenal returns to the investors. Markets always price in the future growth. Is the best over for the sector or is there more steam left? Recent results of HFC’s signifies pressure on margins and lower NIMs. So it is not a runaway sector wherein you will bet on any horse and you will win. Stock selection has to be spot on. In addition, paints, cement, sanitaryware, banks and related companies are quoting at high valuations. It will be challenging for a fund to buy at such levels and expecting reasonable appreciation in the next three years.
(c) Increased competition in affordable housing space – In the last few years, there is a mushrooming of housing finances companies providing loans in affordable housing space. Even another company is coming up with a housing finance company. In addition, due to the recent bank recapitalization, we will have the big boys lend more and thus eat into the affordable housing pie. The stock selection needs to be spot on.
(d) A balanced approach – There is a Debt & Money Market instruments (15-20%) portion for managing volatility vis-a-vis equities which is an interesting proposition. Such a portion will help reduce the volatility, normally associated with a thematic fund.
(e) Return expectation over a 3 year period – It is very difficult to envisage what kind of return expectation should be there from the fund. It has a balanced component in term of debt & Money Market instruments and at the same time, it will invest across various themes associated with the housing sector. For investing in a thematic fund, there is a higher expectation against all the risk an investor is taking by investing in such funds. Is it a thematic fund, diversified fund or a balanced fund?
(f) Government policy flip-flops – The fund is significantly dependent on government’s “Housing for All” theme and benefits doled out because of it. Affordable housing remains a low margin offering and completing the project on time within the available budget remains a challenge. Above all, government support is also a sentiment booster for the sector. Though present government’s approach has been quite consistent as regards affordable housing push, any policy flip-flops from on government’s behalf concerning the sector can have an adverse impact on the fund dynamics.
(g) Investor’s risk profile and current portfolio state: The advisor needs to view the risk profile of the investor and recommend accordingly. In addition, current portfolio state must be reviewed and where such a fund fits the bill in the investor’s overall portfolio should be analyzed.
(h) Fund house pedigree: Last but not the least, the fund is offered by HDFC Mutual fund, one of the most respected fund houses in India creating wealth over the years with the likes of HDFC Equity Fund, HDFC Top 200, HDFC Tax Saver Fund, HDFC Midcap Opportunities Fund to name a few – a definitive comforting factor for the investors.
(i) Entry and exit options with no SIP option available – This is close-ended scheme wherein you need to invest within NFO time period for 3 years and 45 days. So no SIP route can be availed here. One cannot sell their units outright. However they will be listed on stock exchanges, so you can sell it if buyers are available. So investors must be aware of entry and exit criteria before investing.
Do share your opinion/thoughts/suggestions about the fund in the comment section below for the benefit of our readers.
Disclaimer: All data points are taken from HDFC Mutual Fund website. The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions.