With Sensex trading above 40,000 mark in each session for close to a month now, there is renewed sense of optimism in equity market. Investors are looking to increase their equity holding through stocks and equity mutual funds with hopes that the market will scale new highs.
But going forward, fresh bouts of volatility cannot be ruled out. Given the difficulties that economy is facing, it could be a while before there is broad based rally in equity markets. Thus, investors who cannot bear very high volatility, but still want to benefit by holding decent exposure in equities can look to invest in aggressive hybrid fund. These funds are capable of benefiting from high growth at relatively lower volatility.
HDFC Hybrid Equity Fund (HHEF) is one such aggressive hybrid fund that aims to generate capital appreciation by investing in a mix of equity and debt instruments.
Launched in September 2000, the fund manages one of the largest assets in the category of Rs 20,926 crore. The fund is managed by Mr Chirag Setalvad (since April 2007) who has over 20 years’ of experience in fund management and equity research.
Graph 1: Growth of Rs 10,000 if invested in HDFC Hybrid Equity Fund 5 years ago
HHEF has shown ordinary performance in the last five years. If you had invested Rs 10,000 in HHEF five years back on December 10, 2014 it would now be worth Rs 15,738. This translates into compounded annualised growth rate of 9.5%. In comparison a simultaneous investment of Rs 10,000 in CRISIL Hybrid 35+65 – Aggressive Index would now be worth Rs 15,348 (a CAGR of 9%). The fund had decent lead over the index until a couple of years ago. However, the level of outperformance has diminished in the last one and half years.
(Source: ACE MF)
Graph 2: HDFC Hybrid Equity Fund’s year-on-year performance
(Source: ACE MF)
HHEF has a track record of around two decades to its credit. The year-on-year performance comparison of the fund relative to CRISIL Hybrid 35+65 – Aggressive Index shows that the fund outperformed the index in 6 out of last 8 calendar years. The fund outpaced the index in most of the years with a noticeable margin, barring CY 2015 where it slightly trailed the index and CY 2018 where it clearly lagged the index. Since CY 2018 the fund has underperformed the index by a significant margin. Though the fund has significantly improved its performance in the current year it failed to catch up with the index.
Table: HDFC Hybrid Equity Fund’s performance vis-a-vis category peers
| Scheme Name | Corpus (Cr.) | 1 Year (%) | 2 Year (%) | 3 Year (%) | 5 Year (%) | Std Dev | Sharpe |
| Mirae Asset Hybrid Equity Fund | 3,005 | 8.37 | 10.43 | 14.34 | N/A | 9.48 | 0.22 |
| Principal Hybrid Equity Fund | 1,511 | 0.74 | 8.37 | 14.06 | 13.42 | 10.05 | 0.14 |
| ICICI Pru Equity & Debt Fund< | 23,501 | 4.18 | 7.26 | 12.56 | 13.86 | 9.71 | 0.11 |
| Sundaram Equity Hybrid Fund | 1,833 | 6.63 | 9.70 | 12.37 | 10.50 | 8.50 | 0.17 |
| Canara Rob Equity Hybrid Fund | 2,701 | 6.96 | 9.24 | 12.37 | 13.70 | 8.59 | 0.18 |
| HDFC Hybrid Equity Fund | 20,926 | 3.93 | 7.07 | 11.84 | 13.85 | 9.16 | 0.13 |
| SBI Equity Hybrid Fund | 31,248 | 7.44 | 10.03 | 11.82 | 14.11 | 9.13 | 0.17 |
| DSP Equity & Bond Fund | 6,253 | 4.91 | 6.76 | 11.09 | 13.72 | 11.04 | 0.11 |
| Kotak Equity Hybrid Fund | 1,461 | 3.58 | 5.30 | 10.06 | 9.32 | 10.37 | 0.09 |
| Nippon India Equity Hybrid Fund | 8,763 | -1.95 | 4.60 | 9.80 | 12.36 | 11.39 | 0.06 |
| L&T Hybrid Equity Fund | 7,895 | 0.17 | 4.89 | 9.73 | 13.16 | 9.79 | 0.09 |
| Edelweiss Aggressive Hybrid Fund | 11 | 4.59 | 7.60 | 9.46 | 10.77 | 9.27 | 0.13 |
| Franklin India Equity Hybrid Fund | 1,830 | 4.09 | 6.51 | 9.42 | 13.03 | 8.40 | 0.07 |
| Shriram Hybrid Equity Fund | 61 | 4.62 | 7.16 | 9.39 | 9.04 | 8.71 | 0.12 |
| Aditya Birla SL Equity Hybrid ’95 Fund | 10,835 | 0.15 | 4.16 | 9.26 | 12.55 | 9.54 | 0.04 |
| LIC MF Equity Hybrid Fund | 394 | 6.84 | 6.52 | 9.19 | 8.21 | 10.36 | 0.08 |
| Baroda Hybrid Equity Fund | 531 | -1.13 | 4.15 | 9.00 | 9.74 | 10.33 | 0.04 |
| Quant Absolute Fund | 2 | 5.01 | 7.00 | 8.91 | 11.53 | 10.91 | 0.09 |
| UTI Hybrid Equity Fund | 4,760 | -1.65 | 3.46 | 8.70 | 9.70 | 9.61 | 0.00 |
| Tata Hybrid Equity Fund | 4,272 | 3.70 | 5.27 | 8.17 | 11.93 | 9.40 | 0.05 |
| CRISIL Hybrid 35+65 – Aggressive Index | 6.42 | 8.32 | 11.25 | 11.06 | 8.15 | 0.15 |
Data as on December 10, 2019
(Source: ACE MF)
While HHEF outperformed the category average across rolling period, it has lagged the CRISIL Hybrid 35+65 – Aggressive Index in 1-year and 2-year rolling period. However, over the longer time horizon of 3-year and 5-year, the fund managed to outpace the index.
Though HHEF is placed behind many of its peers on a 1-year and 2-year rolling return basis, it stands among the top performers on a 3-year and 5-year rolling return basis. Mirae Asset Hybrid Equity Fund, ICICI Pru Equity & Debt Fund, Canara Robeco Equity Hybrid Fund, SBI Equity Hybrid Fund and Sundaram Equity Hybrid Fund are the other top performers in the category.
In terms of risk-return profile, the fund’s volatility was lower compared to most funds in the category but higher as compared to the index. Regardless, it has rewarded investors with reasonable risk-adjusted returns.
Investment strategy of HDFC Hybrid Equity Fund
Categorised as aggressive hybrid fund, HHEF has the flexibility to invest 65-80% of its assets in equity and equity related instruments and 20-35% in debt instruments. The fund has the flexibility to invest across market capitalisation.
The fund’s equity strategy involves focusing on quality businesses having reasonable growth prospects, sound financial strength, and sustainable business models, available at acceptable valuations. It follows bottom up stock picking approach to select stocks across market capitalisation and aims to maintain a reasonably diversified portfolio at all times.
On the debt front, the fund has the flexibility to invest in the entire range of debt instruments. Allocation in debt instruments is based on credit quality, liquidity, interest rates and their outlook.
Graph 3: Portfolio allocation and market capitalisation trend in HDFC Hybrid Equity Fund
(Source: ACE MF)
HHEF follows a multi cap approach to invest across market capitalisation but with a large cap bias. The fund usually allocates around 70% of its portfolio in equities.
Over the last 12 months, the fund’s allocation to large caps was in the range of 45-55% while it also has significant allocation to mid caps between 10-15% and small caps 5-10%. In the last one year the fund has slightly reduced its exposure to mid and small caps whereas that of large caps has been increased.
HHEF invests close to 30% of its assets in moderate to high rated debt instruments. The debt portfolio predominantly includes corporate debt and government securities.
Graph 4: Top portfolio holdings in HDFC Hybrid Equity Fund
(Source: ACE MF)
As on November 30, 2019, HHEF held 54 stocks in its portfolio across various sectors. The top 10 stocks constitute around 40% of the portfolio. HDFC Bank has the highest allocation in the portfolio of 9.1%, followed by ICICI Bank, HDFC Ltd., and Infosys at 6.8%, 5.1% and 4.7% respectively. Rest of the stocks in the top 10 holding have allocation in the range of 1.5-3%
The fund has a high sectoral allocation to Banks at 21.1% with another 5.9% in Finance. It also has prominent investment in the range of 3-5% in sectors like Infotech, Engineering, and Consumption.
HHEF holds its debt allocation predominantly in Corporate Debt and G-secs. The fund’s investment in Corporate Debts is around 19% along with around 8.6% in G-secs. Having an average maturity of 2.78 years and modified duration of 2.21 years, the yield-to-maturity of the debt portfolio is at 6.67%.
Top contributors
Among the stocks in the portfolio, ICICI Bank contributed the most to the fund’s gain in the last one year with a weighted return of 1.7%. The fund also benefited from its holding in HDFC Bank, Reliance Industries and HDFC
On the other hand, it’s holding in Aurobindo Pharma, Edelweiss Financial Services, Yes Bank, ONGC, Vedanta, Tata Steel and L&T eroded some of the gains.
Suitability of HDFC Hybrid Equity Fund
HHEF invests in a mix of equity and debt instruments which can help it take advantage of changing dynamics across asset class. While the equity portion can enable capital growth, the debt portion can work as cushion against market volatility. HHEF invests in a well-diversified portfolio across market capitalisation. Its large cap bias can provide stability while its exposure to mid and small caps can potentially generate higher returns. Though the fund has underperformed in the short term it has rewarded investors reasonably well over the long term. It is suitable for investors having moderately high risk appetite and investment horizon of 5 years or more.
Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
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This article first appeared on PersonalFN here
