Welcome to PersonalFN’s weekly analysis on diversified equity mutual funds! In this issue, we have analysed HDFC Flexi Cap Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

HDFC Flexi Cap Fund is a popular Flexi Cap Fund that has made a robust comeback after a witnessing a rough patch. It has delivered impressive returns over the past few years and has rewarded investors for their patience. The fund focuses on realising the long-term potential of its high-conviction, fundamentally sound stocks.

What is the growth of Rs 10,000 invested in HDFC Flexi Cap Fund five years ago?

Past performance is not an indicator of future returns
Data as of November 21, 2023
(Source: ACE MF, data collated by PersonalFN) 

HDFC Flexi Cap Fund, formerly known as HDFC Equity Fund, stands as one of the oldest schemes in the Flexi Cap Fund category. Launched in January 1995, the fund has generated an impressive CAGR of approximately 18.5% since its inception, with its AUM now reaching a mammoth Rs 39,396 crore. Initially operating as a Multi Cap Fund focusing predominantly on large caps, it underwent reclassification in January 2021, transforming it into a Flexi Cap Fund. This shift aligned it with SEBI’s revised category definition.

Notably, the fund always followed a dynamic investment strategy to invest across market caps depending on the available opportunities, but with a bias towards large caps. Therefore, the change in categorisation did not have any impact on the investment philosophy of the scheme.

[Read:  All You Need to Know About the New Flexi Cap Category under Equity Mutual Funds]

HDFC Flexi Cap Fund gained prominence due to its robust performance under the management of its former fund manager, Mr Prashant Jain. However, the fund faced a challenging period in 2015-16 and then between 2019 and 2020, primarily due to higher exposure to certain high-conviction bets on Infotech, Engineering, and PSU stocks, that were out of favour during those periods. Nonetheless, the fund exhibited a turnaround growth as its bets on PSUs, Infotech, Pharma, and Engineering excelled in the latter half of 2020. It now stands among the top quartile performers in the category across time frames.

In the last five years, HDFC Flexi Cap Fund has grown at a CAGR of about 18.1% compared to a growth of 15.8% in its benchmark Nifty 500 – TRI. An investment of Rs 10,000 in HDFC Flexi Cap Fund five years back would have now appreciated to Rs 22,951 compared to a valuation of Rs 20,822 for a simultaneous investment in its benchmark.

How has HDFC Flexi Cap Fund performed in the past?

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Flexi Cap Fund	2,163	18.30	12.94	33.71	25.16	22.27	18.87	0.39
HDFC Flexi Cap Fund	39,396	20.00	17.71	29.30	18.07	17.31	16.29	0.41
JM Flexicap Fund	718	30.17	16.98	27.04	20.38	19.03	15.73	0.40
Franklin India Flexi Cap Fund	11,940	19.42	11.18	24.45	17.32	16.04	15.71	0.36
Parag Parikh Flexi Cap Fund	44,038	27.01	10.02	23.75	22.94	20.41	12.77	0.38
Union Flexi Cap Fund	1,621	20.25	8.88	21.76	18.41	16.47	14.29	0.32
Edelweiss Flexi Cap Fund	1,297	17.53	9.88	21.57	17.02	17.69	14.55	0.32
HSBC Flexi Cap Fund	3,504	22.69	10.59	20.38	14.62	14.58	13.45	0.31
PGIM India Flexi Cap Fund	5,633	11.95	3.04	20.03	20.05	18.36	15.48	0.29
DSP Flexi Cap Fund	8,856	22.01	7.52	19.73	18.17	16.83	15.75	0.28
NIFTY 500 – TRI		15.10	8.46	19.87	15.79	15.98	14.96	0.29

The securities quoted are for illustration only and are not recommendatory.
Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as of November 21, 2023
(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 before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

HDFC Flexi Cap Fund boasts an impressive long-term performance history, although it has experienced extended periods of underperformance. In the last two years, the fund delivered a CAGR of around 17.7%, thereby outperforming the benchmark and the category average by a remarkable margin of around 8.5% to 9% CAGR. Notably, most of its prominent peers have struggled to keep pace with the benchmark during this period.

HDFC Flexi Cap Fund’s extraordinary performance in recent years has significantly improved its long-term returns as well. The fund now stands among the top quartile performers in the category across different time frames and has also generated noticeable alpha over the benchmark.

The bouts of underperformance and ensuing sharp uptick in its returns have resulted in higher volatility in performance compared to the benchmark and its peers. Nonetheless, HDFC Flexi Cap Fund has compensated its investors well by recording higher risk-adjusted returns, as denoted by its higher Sharpe ratio of 0.41, which is much ahead of the benchmark and most of its peers.

[Read:  7 Top-performing Flexi Cap Mutual Funds with High Returns on 10-Year SIP]

[Read:  Best Flexi Cap Mutual Funds to Invest in 2023 – Top Performing Flexi Cap Mutual Funds in India]

What is the investment strategy of HDFC Flexi Cap Fund?

Categorised as a Flexi Cap Fund, HDFC Flexi Cap Fund is mandated to invest at least 65% of its assets in Indian equities. It has the flexibility to invest without any market cap or sector restriction. Accordingly, it aims to create a diversified portfolio spread across major industries, economic sectors, and market capitalisation that offers an acceptable risk-reward balance. HDFC Flexi Cap Fund follows a blend of growth and value styles of investing to generate optimal returns and avoids investing in momentum-driven bets, even if it results in short-term underperformance. The scheme predominantly invests in companies that:

a) Are likely to achieve above-average growth;

b) Enjoy distinct competitive advantages, and;

c) Have superior financial strength.

HDFC Flexi Cap Fund maintains a large-cap-biased portfolio wherein it invests 70-85% of its assets, with the remaining in mid-cap and small-cap stocks. The fund has high conviction in most of its stocks and holds them with a long-term view. Accordingly, the fund has recorded a low turnover ratio of about 20-40% in the last two years.

What are the top portfolio holdings in HDFC Flexi Cap Fund?

Holding in (%) as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN) 

HDFC Flexi Cap Fund usually holds around 45-55 stocks spread across market caps and sectors. As of October 31, 2023, the fund held a compact portfolio of 41 stocks, with the top 10 stocks accounting for about 55% of its assets. Popular large-cap names such as HDFC Bank, ICICI Bank, NTPC, and HCL Technologies currently form part of its top holdings. Cipla, SBI, Bharti Airtel, SBI Life Insurance Company, Hindustan Aeronautics, and Apollo Hospitals Enterprise are among the other stocks that form part of the fund’s top 10 holdings. The fund has limited the exposure to individual stocks in the mid-cap and small-cap segments to under 2%.

In the last two years, HDFC Flexi Cap Fund benefitted the most from its holdings in NTPC, L&T, Hindustan Aeronautics, Bank of Baroda, Bharat Dynamics, SBI, and ICICI Bank, which contributed over 15% to its absolute gains. Axis Bank, Bharti Airtel, Kalpataru Projects International, Varroc Engineering, Lupin, and Mahindra & Mahindra were among the other top contributors to its gains. It booked profit in Container Corporation of India, Escorts Kubota, Ashok Leyland, Bajaj Auto, Tata Communications, Bharat Electronics, IRFC, and Tata Motors, among others.

In terms of sectors, HDFC Flexi Cap Fund ‘s portfolio is skewed towards Banking & Finance stocks that collectively form around 35.9% of its assets. It holds substantial allocations in Infotech, Power, and Pharma that form another 26.8% of its assets. The fund also holds diversification to Engineering, Telecom, Healthcare, Auto, and Oil & Gas, among others. Its portfolio has a well-balanced allocation to cyclical, defensive, and sensitive sectors.

Is HDFC Flexi Cap Fund suitable for my investment goals and risk tolerance?

HDFC Flexi Cap Fund has demonstrated a remarkable turnaround performance over the past few years, reclaiming its position among the top performers in the Flexi Cap Fund category. Although it may not excel in bear markets, the fund’s return profile outshines during bull market phases, offering investors reasonable rewards over complete market cycles.

Due to its high-conviction approach, HDFC Flexi Cap Fund might experience periods of underperformance in the short to medium term, particularly when its high-conviction bets are out of favour, or during momentum-driven market upswings. However, the focus on creating a well-diversified portfolio of fundamentally sound stocks positions it to potentially recover with superior gains. Notably, the fund has established a dependable track record of delivering reasonable risk-adjusted returns over the long term.

HDFC Flexi Cap Fund is suitable for investors looking for a Flexi Cap Fund that focuses on picking high-conviction stocks and have an investment horizon of at least 5 to 7 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