HDFC Diversified Equity All Cap Fund of Funds: The Smart Way to Diversify Your Equity Portfolio

You probably know this already. Most investors make the same mistake when picking equity funds. They chase what performed best last year, load up on one market segment, and then panic when that segment inevitably underperforms. The result? A portfolio that looks good on paper but doesn't capture the full growth potential of India's stock market.

There's a smarter approach. Instead of playing market segment roulette, what if you could access large caps, mid caps, and small caps through a single fund that actively manages the mix based on market conditions? That's the philosophy behind HDFC Diversified Equity All Cap Active Fund of Funds (HDFC DEACAF).​

Understanding the Core Problem

Here's what the data shows. Over the last two decades, market segment winners keep changing every few years. In FY2021, small caps surged 119% while large caps returned 71%. Fast forward to FY2023, and the script flipped, with large caps outperforming small caps. This isn't random volatility, it's the nature of market cycles.​

Most investors don't have the expertise to time these shifts. They hold a static allocation across segments and hope for the best. Or worse, they chase last year's winner and miss the next cycle entirely. The behavioral biases that come from these performance variations are exactly what derail long-term wealth creation.

What Makes a Fund of Funds Different

An active Fund of Funds (FOF) isn't just another equity fund. Unlike traditional equity schemes that pick individual stocks, an FOF invests in carefully selected equity funds. This creates a layer of diversification that most single equity funds can't match.​

Think of it this way. When you invest in a regular equity fund, you get exposure to one fund manager's stock picks and their investment style. When you invest in an active FOF, you get exposure to multiple fund managers, each with different expertise and investment philosophies. Plus, the FOF manager actively rebalances across market caps based on valuations, market sentiment, and macroeconomic factors.​

This dynamic allocation is crucial. When large caps become expensive relative to their earnings potential, the fund can reduce exposure. When mid caps show value, it can increase positioning. This counter-cyclical approach naturally reduces the behavioral errors that plague most investor portfolios.

Why HDFC DEACAF Stands Out

HDFC AMC brings 25+ years of fund management excellence to this strategy. The firm manages over ₹5.7 lakh crore across 90+ schemes, making it one of India's most established asset managers.​

More importantly, HDFC DEACAF invests across a diversified mix of HDFC's own equity funds, each managed by specialized fund managers. The fund covers large caps, mid caps, and small caps, with underlying schemes providing exposure to 85% of India's market cap through a 400+ stock universe. The research backbone here is rigorous and deep.​

The fund follows a disciplined framework called VLSM—Valuations, Liquidity, Sentiments, and Macro variables. Rather than making emotional allocation decisions, the VLSM model helps the fund identify attractive opportunities across market segments while managing downside risk through diversification.​

Monthly rebalancing ensures the portfolio stays aligned with changing market conditions. Yet here's the tax efficiency advantage: internal rebalancing within the FOF structure happens without triggering capital gains tax events for investors. Compare this to manually rebalancing across multiple funds in your portfolio, and the tax savings become material over time.​

The Performance Foundation You're Investing In

The underlying schemes backing HDFC DEACAF have proven track records. HDFC's flagship funds have delivered strong long-term returns across various market cycles:​

HDFC Flexi Cap Fund has generated 18.87% since inception. HDFC Mid Cap Fund returned 17.74% since inception, while HDFC Small Cap Fund delivered 16.37%. HDFC Focused Fund and HDFC Multi Cap Fund have also demonstrated consistent wealth creation. These aren't flash-in-the-pan performers, they're funds with decades of experience navigating multiple market regimes.​

The fund managers are seasoned professionals. Srinivasan Ramamurthy, the primary portfolio manager, brings 18+ years of experience and currently oversees 12 schemes with ₹1.5 lakh crore in AUM. He manages key funds like HDFC Balanced Advantage Fund and HDFC Multi Asset Fund, both known for disciplined, systematic approaches.​

Who Should Actually Invest?

HDFC DEACAF makes sense if you want an all-equity portfolio but don't have the time or expertise to manage allocation across market caps yourself. Investors seeking long-term growth with professional management across market cycles are ideal candidates. If you prefer minimal intervention and want your portfolio rebalanced automatically based on market valuations, this fund deserves serious consideration.​

The fund is especially suited for investors concerned about behavioral biases. Instead of chasing recent winners, you get a structured, research-backed approach that tilts toward undervalued segments and away from expensive ones. This discipline has historically led to better risk-adjusted returns over full market cycles.​

How to Deploy Your Money

For current lump sum investments or accumulated savings, you have two options. Invest in a lump sum if market valuations seem reasonable. Alternatively, use a 6 to 9-month Systematic Transfer Plan (STP) from a debt fund to average your entry if you're concerned about near-term volatility.​

For ongoing savings, Systematic Investment Plans (SIPs) with 10% to 20% annual top-ups work best. SIPs remove the timing dilemma entirely. You invest regularly regardless of market conditions, and annual top-ups help you scale your wealth creation as your income grows.​

The suggested investment horizon is 5+ years. While the fund can capture opportunities across market cycles, you need sufficient time for rebalancing to work effectively and for compounding to compound. Short-term performance will vary, but the long-term philosophy should deliver balanced wealth creation.​

The Tax Efficiency Angle

From a tax perspective, long-term capital gains on holdings beyond 2 years are taxed at 12.5%, a favorable rate that rewards patient investing. Redemptions within 2 years are taxed as per your income tax slab, so the fund structure incentivizes long-term holding.​

The real tax advantage comes from internal rebalancing. Most investors would need to sell units in one fund and buy in another to achieve similar rebalancing. Each transaction creates capital gains tax. With HDFC DEACAF, the same rebalancing happens within the FOF without triggering immediate tax consequences for you. Over a long term, this tax efficiency can add meaningful value.​

Cost Efficiency Despite the Structure

You might expect an FOF to charge premium fees given the added layer of professional management. Instead, HDFC DEACAF's expense ratio is in line with flexi cap funds, making it a cost-effective way to access multi-cap, multi-manager diversification. You're paying for the active rebalancing and professional allocation expertise without bearing the premium that might typically come with a FOF structure.​

The Bottom Line

Equity investing doesn't have to be complicated. You don't need to time market segments or guess which fund manager will outperform next year. HDFC DEACAF takes care of that complexity. Through active rebalancing across market caps, multi-manager expertise, and tax-efficient internal allocation, the fund addresses the real challenges that most equity investors face.​

It's designed for long-term wealth creation without the behavioral errors. That's the promise, and the execution model backs it up.

Frequently Asked Questions

How is HDFC DEACAF different from investing in a diversified portfolio of funds myself?

The main difference lies in active rebalancing and tax efficiency. HDFC DEACAF rebalances monthly based on valuations, liquidity, sentiment, and macroeconomic factors without triggering capital gains tax events. If you manually invested in multiple funds and rebalanced yourself, each rebalancing would create taxable events. Additionally, the professional management actively tilts allocation away from expensive segments and toward value opportunities, reducing behavioral biases that derail self-managed portfolios.

Won't the fund simply underperform if large caps are in a bull market?

Not necessarily. The fund maintains meaningful exposure to large caps at all times. When large caps rally, this allocation contributes to returns. However, the fund also maintains exposure to mid caps and small caps, which can generate additional returns during different phases of the cycle. The trade-off is that the fund won't outperform if one segment goes on an extended bull run, but it will deliver more consistent returns across full market cycles.​

What happens if HDFC's underlying funds underperform?

HDFC's track record shows consistent performance across different market cycles. The underlying schemes have 3 to 20 years of history, demonstrating resilience through multiple bull and bear markets. However, no fund can guarantee outperformance in every period. The active rebalancing in HDFC DEACAF helps mitigate underperformance by adjusting exposure, but investors should have realistic expectations about market cycle volatility.​

How does this fund handle cash when it's waiting to deploy?

The fund maintains a cash component as part of its disciplined allocation framework. When market valuations appear stretched, higher cash holdings provide dry powder to deploy when prices become more attractive. This counter-cyclical approach adds flexibility to the rebalancing process and helps smooth volatility over time.