The Hindu Business Line : HDFC Mutual Fund plans core & satellite schemes

HDFC Mutual Fund has worked out a diversified equity scheme to invest in companies that may be divided into two distinct groups — core and satellite — on the basis of factors such as market capitalisation, risk profile and return expectations.

The proposed HDFC Core & Satellite Fund (HC&SF), to be benchmarked against the BSE 200 index, will be an open-ended scheme seeking capital appreciation through exposure to stocks that are said to be quoting below their "true value."

The core portfolio, which will constitute 60 per cent to 80 per cent of the total, will comprise large-cap stocks of companies with long, successful track records. These will enjoy competitive advantages and command lead status (positioned among the first three names in the respective areas) in the market. There will be a basket of 10 to 20 stocks, each available below its intrinsic value. The average exposure per company will be between 3 per cent and 8 per cent.

The satellite group, which will be made to complement the core assets, will embrace small and mid-cap outfits, each with a relatively higher risk but carrying potential for higher returns as well. It will have 10 to 20 stocks, with the average exposure kept between 1 per cent and 4 per cent. HC&SF, according to the draft offer document sent to SEBI for approval, may also use derivatives for hedging and portfolio balancing.

For the satellite group, companies will be selected on the basis of certain critical conditions. In short, these include: Presence in an emerging area or use of a new business model; application of new technology or research, irrespective of substantial commercial success till date; companies that are out of favour at a given point; turnaround cases; and companies with the potential to benefit from changes in external factors such as commodity prices and exchange rates.

HDFC MF, which has named Mr Sanjoy Bhattacharyya, CIO, as the fund manager, has fixed an entry load of 2.25 per cent. It is expected that stocks forming the core group will generate stability, while those in the satellite group will create scope for increased returns. The latter will be more diversified in nature.