Aggressive hybrid funds, also known as Equity hybrid funds allow you to invest in a mixed portfolio of equity and debt securities. A combination of these asset classes offers a high level of diversification, hence, lowering the risk as compared to pure equity funds. Thus, aggressive hybrid funds can provide some stability to your portfolio.

The equity assets in this category of funds range between 65%-80% of its total assets, while debt instruments have an exposure of 20%-35% in the portfolio. Given the high equity allocation, it becomes clear that Aggressive Hybrid Funds are not insulated from market volatility. However, with the cushioning of the debt portfolio, they are better equipped to minimise downside risk, vis-a-vis diversified equity funds.

However, not all aggressive hybrid funds may be efficient in generating stable returns across market cycles. Therefore, you need to choose schemes prudently.

HDFC Hybrid Equity Fund (HHEF) is one of the most popular funds in the aggressive hybrid funds category has an effective track record of rewarding long term investors with superior risk-adjusted returns.

Graph 1: Growth of Rs 10,000 if invested in HDFC Hybrid Equity Fund 5 years ago

Data as on February 09, 2021
(Source: ACE MF)  

Classified under Aggressive Hybrid Funds category, HHEF invests in a mix of equity and debt and uses sound risk management processes to deal with market volatility. HHEF has proven its ability to stand strong across market cycles. It has done well to restrict losses in past bear markets while delivering superior returns in the bull market conditions. Though HHEF has trailed the benchmark in the last couple of years, it is a relatively stable and reliable fund in the aggressive hybrid funds category. Over the last five-years, HHEF has delivered a decent performance and has managed to generate returns nearly in line with the benchmark CRISIL Hybrid 35+65 – Aggressive index. An investment of Rs 10,000 invested in the fund 5 years back would have appreciated at around 15.5% CAGR to Rs 20,510. A simultaneous investment in the benchmark index would have valued at Rs 19,895 (at 14.8% CAGR).

Table: HDFC Hybrid Equity Fund’s performance vis-à-vis category peers

Scheme Name	Corpus (Cr.)	1 Year (%)	2 Year (%)	3 Year (%)	5 Year (%)	7 Year (%)	Std Dev	Sharpe
Canara Rob Equity Hybrid Fund	4,208	23.92	20.09	14.78	16.95	18.04	14.79	0.152
Mirae Asset Hybrid Equity Fund	4,384	23.73	18.94	13.85	17.51	—	16.82	0.121
DSP Equity & Bond Fund	6,079	19.35	20.97	12.68	16.08	17.75	17.64	0.103
SBI Equity Hybrid Fund	34,653	16.91	18.13	12.52	14.74	17.22	16.20	0.102
Kotak Equity Hybrid Fund	1,257	23.57	22.22	12.49	16.05	—	19.14	0.096
Franklin India Equity Hybrid Fund	1,323	22.45	17.03	11.49	13.74	16.44	16.92	0.089
HDFC Hybrid Equity Fund	16,617	23.99	16.92	10.57	15.43	17.29	17.54	0.053
ICICI Pru Equity & Debt Fund	15,793	20.80	17.03	10.11	15.68	16.77	18.92	0.056
L&T Hybrid Equity Fund	5,341	19.57	15.91	8.90	13.04	16.36	17.04	0.047
Aditya Birla SL Equity Hybrid '95 Fund	7,562	19.14	13.09	7.62	12.59	15.41	17.83	0.033
CRISIL Hybrid 35+65 – Aggressive Index		22.05	17.24	12.55	14.76	14.40	14.95	0.105

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on February 09, 2021
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

With below average performance in the recent selloff phase HHEF’s short term performance has suffered, though it has still managed to deliver returns in line with the category average. Nonetheless, the improvement in performance in the last one year gives confidence about its potential to deliver superior returns over a complete market cycle. The fund’s long term track record is encouraging; it has fared better than the benchmark and many of its peers over the long term horizon of 5-year and 7-year period.

In terms of risk-reward parameters, while the volatility registered by HHEF is competitive to the category average, it is higher than the benchmark. While the fund has trailed the benchmark and the category average in terms of risk-adjusted returns, it has the potential to make a comeback.

Investment strategy of HDFC Hybrid Equity Fund

Being an aggressive hybrid fund, HHEF is mandated to invest 65% to 80% of its assets in equities and 20% to 35% in debt instruments. The fund usually maintains an equity allocation of 65% to 70%, while the remaining is allocated to debt. While picking stocks, the fund manager looks to invest in businesses with good management and superior growth prospects available at a reasonable price; and follows bottom up approach to identify high quality growth oriented stocks for the long term.

Having flexibility to invest the equity portion of its portfolio across market capitalisation, it maintains higher allocation to large caps along with significant diversification to mid and small caps. It usually holds around 50-70 stocks in the portfolio, and follows buy and hold strategy, where the equity portion of the portfolio is not churned often. HHEF carries an extremely low portfolio turnover ratio of less than 10% which shows its preference to stay invested for the long term and the high conviction the fund has in its holdings.

Under debt, the fund holds flexibility to invest across duration. The debt portion of the portfolio is spread across range of debt instruments, with preference towards high rated instruments.

Graph 2: Top portfolio holdings in HDFC Hybrid Equity Fund

Holding in (%) as on January 31, 2021
(Source: ACE MF)

As on January 31, 2021, HHEF held 39 stocks in its portfolio, with top exposure to large cap names like ICICI Bank, HDFC Ltd., HDFC Bank, Infosys and L&T. While these top 5 stocks accounted for about 31.7% of its assets, the top 10 stock holdings together made up for around 48.3% of the portfolio. Most of these stocks have been among the core holdings in the portfolio for quite long time.

In the last one year, HHEF has benefited immensely from its exposure to Infosys, Aurobindo Pharma, HDFC Bank, Reliance Industries, Bharat Electronics, among others. However, its exposure to IndusInd Bank, ITC, SBI, Axis Bank, etc. eroded some of its gains.

Around 30% HHEF’s portfolio is inclined towards financial services which includes Banking (22.7%) and Financials (7.2%). Engineering stocks form the next highest allocation at 8.6% of the total assets, while Petroleum and Infotech follow closely behind with an exposure of around 6%. HHEF also carries significant exposure to Power, Pharma, Chemicals, Consumption, Metal, Telecom, among others.

On the debt side, HHEF predominantly holds exposure to Corporate Debt Instruments (16.5%) with moderate to high credit ratings as well as Sovereign rated G-Secs (6.6%). The fund plays out the interest rate cycle well, increasing duration during easing interest rate conditions, and reducing exposure to longer duration instruments when interest rates bottom out. This adds to the stability of the portfolio and gives additional boost to its returns. The average maturity of the debt portfolio is around 2.5 years which makes it less sensitive to interest rate changes.

Suitability

HHEF has a reliable track record of delivering decent risk-adjusted returns which is an outcome of its sound investment processes that have been enhanced through the years, and shows its ability to deliver in future as well. Though HHEF has disappointed in terms of containing downside risk in the recent corrective phase, its performance over complete market cycle is healthy. This gives confidence to hold the investment in the scheme with a long term view.

The fund manager Mr Chirag Setalvad, who has been managing the original balanced fund for over a decade now, takes high conviction bets and prefers to hold the investments and allocation for the long term. This makes HHEF suitable for investors with a moderate risk appetite and an investment horizon of at least 5 years.

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.

This article first appeared on PersonalFN here