HDFC Diversified Equity All Cap Active FOF: Dynamic diversification across market caps

HDFC AMC is launching its New Fund Offer (NFO) – HDFC Diversified Equity All Cap Active FOF. This FOF, which will open for subscription on 10^th September 2025 and close for subscription on 25^th September 2025, aims to invest in multiple underlying equity-oriented schemes based on varied market caps. In this article we will review the NFO.

Investment dilemma in choosing the ideal market capitalization

Investors face various challenges in when making any investment decisions. The reasons behind the same are:

Winners keep changing amongst Market Caps: If you observe the left-hand side chart below, you would notice that large, mid, and small caps have delivered varying performance from FY2006 to FY2025. As a matter of fact, we can observe from the same chart that various news and events can lead a market cap segment to underperform the other market cap segments for 3 years in a row, signalling to the divergence of annual returns. But if you observe the right-hand side chart below, you would notice that the decadal returns across multiple market cap segments tend to become convergent in nature.

The Bottomline: Short-term volatile movements of the market can lead investors to make behavioural errors. With volatility of returns reducing in the long-term, it is important for investors to invest in a solution that helps them cut through the noise, and remain focused on long-term wealth creation.

Source: Bloomberg. Large Cap = NIFTY 100 TRI; Mid Cap = NIFTY Midcap 150 TRI, Small Cap = NIFTY Smallcap 250 TRI. For FY06, starting point is April 01, 2005 instead of the previous year end, as NIFTY Midcap 150 TRI and NIFTY Smallcap 250 TRI values start from April 01, 2005 onwards.

Recency Bias: Flows have chased the prior trend of relative performance of large caps and small caps. (See chart below). A holistic asset allocation across the three market cap segments by considering backward-looking and forward-looking parameters, coupled with appropriate rebalancing at opportune times can help in avoiding this bias.

Source: MFI Explorer, Bloomberg. Large Cap = NIFTY 100 TRI, Small Cap = NIFTY Smallcap 250 TRI

Why is it difficult to allocate and rebalance assets yourself?

• Needs time and resources: One needs to compute current allocation, amount to be rebalanced, and then execute on various platforms.


• Exposes you to transaction costs: Investors may need to bear exit loads, pay taxes on capital gains or optimize for them.


• Prone to behavioural errors: Investors may skip rebalancing on account of recency bias.


• Errors in investment decisions: Scope for lack of systematic rebalancing could lead to sub-optimal investment decisions.


• Portfolio management: Friction reduces the efficiency and ease of portfolio management.

Why invest in a Diversified Equity All Cap Active FOF?

• Diversification across Market Caps: A Diversified Equity All Cap Active FOF will invest across market cap segments and across industry sectors. Such a diversification ensures that the negative performance of one of the market caps or sectors reduces the impact to the overall performance of the FOF.


• Tax Implications of Switching between Underlying Schemes: Switching between funds can lead to significant tax consequences for investors. The structure of FOF allows better tax efficiency, as there is no tax incurred on switching between underlying schemes of the Fund.


• Efficient taxation for FOFs: As per the Income Tax, 1961 pursuant to Finance Act (No.2), 2024, applicable from FY 2025-26, FOFs are classified as "Other than Specified Mutual Fund". Accordingly, the tax implications for investments made in the Scheme shall be governed by the provisions applicable to Other than Specified Mutual Funds. For such FOFs, capital gains will be taxed at investor's income tax slab rate for a holding period less than 24 months and 12.5% for a holding period exceeding 24 months.

HDFC Diversified Equity All Cap Active FOF

HDFC Diversified Equity All Cap Active FOF is an open-ended Fund of Fund (FOF) investing in units of domestic equity-oriented schemes. The NFO opens on 10^th September 2025, and closes on 24^th September, 2025. The fund offers a strategic approach to manage investments across different market conditions and aims to provide capital appreciation through diversified investments in equity-oriented schemes across various market capitalizations. The fund also offers tax efficiency, as reallocations within the fund are tax-neutral. The fund is an easy and convenient way to get all-round equity exposure across multiple market caps, fund managers, investment styles through a single fund. The fund is managed by Mr. Srinivasan Ramamurthy. The benchmark for the fund is the NIFTY 500 (TRI).

Asset Allocation and Investment Rebalancing

The fund's asset allocation focuses on equity while maintaining a small portion in debt and money market instruments.

• The allocation is 95%-100% in equity, with 0%-5% in debt and money market instruments.


• The Fund Manager will adjust the portfolio based allocations provided by the framework (definition of the same provided below).


• The investment strategy includes framework driven approach for long-term growth which has the potential to provide higher risk-adjusted returns.

Framework driven approach of Allocation with Disciplined Rebalancing

The Fund Manager aims to follow a counter cyclical disciplined approach towards equity allocations coupled with a disciplined rebalancing process, with the objective of providing investors with a smoother wealth creation journey that reduces portfolio volatility and susceptibility to drawdowns. The framework relies on input variables identified across market valuations, liquidity, sentiments, and macro. The framework deploys a valuation sensitive counter-cyclical approach with monthly (or more frequent if needed) re-balancing. Further, the choice of schemes will be made on the basis of the determined market capitalization allocations and ensuring diversity across fund manager styles. This should help achieve the end objective of providing investors with a smoother wealth creation journey.

Why invest in HDFC Diversified Equity All Cap Active FOF?

1. Equity Mutual Fund selection and rebalancing done professionally by an experienced Fund Manager


2. Fewer investment actions for investors may result in fewer behavioural errors


3. Framework-driven approach to allocating across market caps, which has potential to provide higher risk-adjusted returns


4. Market capitalization coverage across large, mid and small caps in a dynamic manner


5. FOF structure allowing exposure to different investment styles through 1 Fund in a tax efficient manner (Surcharge as applicable + Health and Education Cess applicable at 4% on aggregate of base tax + surcharge. In view of the individual nature of tax consequences, each investor is advised to consult his / her own professional tax advisor. The information given here is neither a complete disclosure of every material fact of Income Tax Act (1961), nor it constitutes a legal or tax advice.)


6. Access to HDFC AMC's ecosystem with long-term investment vintage, time-tested investment philosophy, rigorous processes and an experienced set of Investment professionals

As mentioned above, HDFC Diversified Equity All Cap Active FOF provides access to experienced fund managers managing different funds with long track records of wealth creation in a single solution. HDFC AMC has a long track record of delivery strong performance with ₹4.5 lakh+ crore of equity fund AUM, including ₹3 lakh+ crore of AUM in the eligible underlying funds of HDFC Diversified Equity All Cap Active FOF (as on 31^st July 2025). Average vintage of the funds is 25 years. The table below shows the long term track record of the eligible underlying funds:

Source: HDFC MF, MFI Explorer

Who should invest in HDFC Diversified Equity All Cap Active FOF?

The fund may be suitable for:

1. Investors with very high-risk appetite


2. Investors looking for expert management with professional fund managers


3. Investors looking for diversification across market caps and dynamically adjust underlying funds.


4. Investors having an investment horizon of more than 5 years.


5. FOF structure allowing exposure to different investment styles through 1 Fund in a tax efficient manner (Surcharge as applicable + Health and Education Cess applicable at 4% on aggregate of base tax + surcharge. In view of the individual nature of tax consequences, each investor is advised to consult his / her own professional tax advisor. The information given here is neither a complete disclosure of every material fact of Income Tax Act (1961), nor it constitutes a legal or tax advice.)

Consult your financial advisor or mutual fund distributor to understand if the fund is suited to you.