HDFC Housing Opportunities Fund: Building on a unique theme

There are no funds focused on the housing space. Lower concentration risk and downside protection are positives

Increasing urbanisation, improving affordability and favourable demographics is driving the demand for housing in India. Besides, under the government’s ‘Housing for All by 2022” scheme, it targets to build almost five crore homes in both rural and urban areas. Affordable housing has been given a further push by providing 100 per cent tax exemption for developers and interest subsidy on housing loans for the low and middle income group. The enacting of the Real Estate Regulatory Act (RERA) is a shot in the arm for the housing industry too.

This focus on housing is expected to benefit not only builders and real-estate developers but also a host of other allied sectors such as cement, paints, electricals, steel, adhesives and chemicals, tiles/sanitary ware, appliances and more. It is on the prospects of listed companies in these segments that the HDFC Housing Opportunities Fund is betting on.

Fund strategy

HDFC Housing Opportunities will be a close-ended, 1140-day scheme. The fund will take 80-85 per cent exposure to equities of housing and allied businesses. The fund will also be open to adding units issued by InvITs and REITs ( if any, in future) up to 10 per cent of its portfolio. The scheme will be benchmarked to the India Housing and Allied Businesses Index developed by the fund house in partnership with a group company of the NSE.

The index will have a minimum of 50 stocks, with a cap of 10 per cent on holdings; industry cap is at 20 per cent. But the fund will be actively managed and, hence, it may be underweight or overweight in sectors/stocks in relation to the index. A key feature of the fund is downside protection using derivatives (put options). But these will not be bought upfront. How much cover to buy, when to buy etc will be decided based on market conditions, says Srinivas Rao Ravuri, the fund manager. “It could be bought if the markets have rallied and the fund has performed well. This will help us lock-in part of the gains to cover the risk due to market volatility, which may arise on account of economic and/or geopolitical developments. Else, we could buy them closer to the 1140-day deadline to cover gains partially”, he explains. “By buying put options at a later date, we would be funding it out of profits made, rather than funding it out of cost by buying it upfront”, he adds.

What’s in it for investors?

Currently, there are no funds focused on the housing space. To that extent, this theme is unique. On the positive side, there is lower concentration risk. According to the fund manager, exposure to one stock will not exceed 10 per cent. Besides, the fund will have a multi-cap profile and will, thus, favour large-caps/mid and small caps, according to market conditions. Downside protection is another positive. The cost for the cover will be limited to the premium paid for the put options.

However, investors must keep in mind that government measures to boost housing and the expected shifting of demand from the unorganised to the organised segment after the implementation of GST has seen many stocks in the housing and allied segments soar. Secondly, the hedge through put options is not a perfect cover.

The fund will have a multi-cap profile, but it will buy Nifty 50 put options. Besides, the hedge will not entirely protect from losses but will only limit it. Next, being close-ended, the investment stays locked for the duration of the fund. Exit option is available through listing, but liquidity may not be high.

The NFO closes on November 30.

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