HDFC Diversified Equity All Cap Active Fund of Fund (FOF): Leveraging the benefit of Multi fund investment strategy

HDFC Diversified Equity All Cap Active Fund of Fund (FOF) was launched in September 2025, and offers investors a streamlined way to gain diversified exposure across large, mid, and small-cap equities through a single scheme. This open-ended FOF invests primarily in HDFC's equity-oriented schemes, employing a framework-driven rebalancing approach to optimize market cap allocations. In this article, we will review the fund and understand why the fund can be an important addition to your portfolio.

Why is a Diversified All caps portfolio desirable?

• Each market cap segment has unique industries, making investment in diversified equity funds one of the potentially most efficient ways to aim for diversification of a portfolio. Certain sectors have market leaders beyond large caps. Exposure to market leaders might require diversification across market caps. Diversified investment in All caps is an effective strategy to capture the diverse opportunity set in the India Growth Story.
  
  

  

  Source: NSE



• Winners keep changing as well as converge at certain times. This kind of varying investment performance can induce behavioural errors while investing. Therefore, a fund dedicated to diversifying investments across different market caps is desirable. 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 will notice that the decadal returns across multiple market cap segments tend to become convergent in nature.
  
  

  

  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



• Do-it-yourself rebalancing invites friction as it needs your time and resources, where you would need to compute current allocation, amount to be rebalanced, and then execute on various platforms. This kind of rebalancing also exposes you to transaction costs: investors may need to bear exit loads, pay taxes on capital gains, or optimize for them. Rebalancing without an expert’s guidance may be prone to behavioural errors: investors may "skip" rebalancing on account of recency bias and the scope for lack of systematic rebalancing could lead to suboptimal investment decisions. All such kinds of friction reduce the efficiency and ease of portfolio management. The chart below shows that flows have chased prior trend of relative performance of large caps and small caps, which is a case in point of recency bias.

Risks of Not Rebalancing

Case Study 1

Small and midcap exuberance in CY14-17 drove higher exposure. The chart below shows Small and Mid-Cap exposure of a "Buy and Hold" Portfolio starting in January 2014, consisting of 50% Large Caps, 25% Mid-Caps and 25% Small Caps. Such a "buy and hold" portfolio was exposed to a higher volatility in 2018, when small and midcaps saw significant correction.

Source: MFI Explorer, Bloomberg. Large Cap = NIFTY 100 TRI; Mid Cap = NIFTY Midcap 150 TRI, Small Cap = NIFTY Small cap 250 TRI. *SMID: Small and Mid-Cap.

Case Study 2

Small and midcap correction in CY18-CY20 drove lower exposure. The chart below shows Small and Mid-Cap Exposure of a "Buy and Hold" portfolio starting in January 2018, consisting of 50% Large Caps, 25% Mid-Caps and 25% Small Caps. Such a "buy and hold" portfolio was under-exposed to the upside in the recovery, when small and mid-caps outperformed large caps

Source: MFI Explorer, Bloomberg. Large Cap = NIFTY 100 TRI; Mid Cap = NIFTY Midcap 150 TRI, Small Cap = NIFTY Small cap 250 TRI. *SMID: Small and Mid-Cap.

Therefore, in conclusion we can say that a framework-based approach to rebalancing market cap allocation could help manage your investments better.

Why invest in a Diversified Equity All Cap FOF?

• Diversification across market caps
  

  Diversified Equity funds invest across various market caps. Such diversification ensures that the negative performance of one of the market caps or sectors does not affect the overall performance of the fund.



• Framework driven approach
  

  Framework-driven approach to allocating across market caps, which has potential to provide higher risk-adjusted returns. Extensive back-testing to remove biases. Continuous feedback loop to modify input parameters and/or weights assigned, resulting in potential to provide higher risk-adjusted returns



• Disciplined rebalancing
  

  Market movements can skew allocations towards certain market cap segments. Framework-driven approach to allocating across market caps will lower portfolio volatility and drawdowns



• Tax Implications of switching funds
  

  Switching between funds can lead to significant tax consequences for investors. Diversified Equity funds reallocate funds within equity schemes without the resultant taxes.



• 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 Mutual Fund". Accordingly, the tax implications for investments made in the Scheme shall be governed by the provisions applicable to Other Mutual Funds. Therefore, funds redeemed in less than 24 months is taxed at slab rate and capital gains from redemptions done more than 24 months is taxed at 12.5%.

HDFC Diversified Equity All Cap Active Fund of Fund (FOF)

The HDFC Diversified Equity All Cap Active Fund of Fund aims for long-term capital appreciation by allocating 95-100% of assets to domestic equity schemes spanning varied market caps, with minimal debt or cash for liquidity. The fund provides access to experienced fund managers managing different funds with long track records of wealth creation in a single solution. The investment strategy includes framework driven approach for long-term growth which has the potential to provide higher risk-adjusted returns. Managed by Srinivasan Ramamurthy, the FOF benchmarks against NIFTY 500 TRI.

Investment Strategy

A proprietary framework assesses valuations, liquidity, sentiments, and macro factors to determine monthly (or more if required) allocations across underlying funds like HDFC Flexi Cap, Large Cap, Mid Cap, Small Cap, and Multi Cap Funds. 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. This enables dynamic rebalancing-more frequent during sharp market moves-reducing behavioural biases and transaction frictions for investors. The multi-manager approach leverages specialized expertise, with underlying funds averaging 21 years of vintage and strong historical CAGRs, such as HDFC Flexi Cap's 18.76% since inception (as on 31^st December 2025). This could help achieve the end objective of providing investors with a smoother wealth creation journey.

Performance Insights

Since its inception in September 2025, the regular plan delivered 1.92% returns as on 16^th January 2026, marginally ahead of its benchmark NIFTY 500 TRI, but the gap is small so far given the fund’s short track record, so it can be heavily influenced by short-term market moves and initial portfolio positioning (including cash levels and the underlying-fund mix). The more useful evaluation will come after the fund completes longer measurement windows (1Y/3Y and a full market cycle), since the product’s core proposition is allocation and rebalancing across market caps via underlying active funds. The underlying schemes showed robust long-term track records HDFC Mid Cap at 17.76% returns since inception (as on 31^st December), HDFC Small Cap at 15.95% returns since inception (as on 31^st December 2025) outperforming benchmarks indices. AUM of the HDFC Diversified Equity All Cap Active Fund of Fund (FOF) grew to Rs 1,805.71 crore by 16^th January 2026, signalling investor interest.

Portfolio Breakdown

The performance of this FOF is dependent on the performance of the Underlying Schemes. The average vintage of underlying funds in the HDFC Diversified Equity All Cap Active Fund of Fund is 21 years. This structure provides broad equity coverage (68.6% of HDFC's equity AUM) via experienced managers.

Source: HDFC MF, as on December 31, 2025

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.