If you want to enjoy the potential benefits of growth and stability in one fund, aggressive hybrids are a good option at a time when both equities and debt asset classes are at an inflection point. For those wanting exposure to equities but are wary of pure-equity volatility, aggressive hybrids on account of the debt component offer a relatively smoother investment experience and benefit of equity taxation. These funds are suitable for those with some risk appetite, and a longer-term investment horizon of at least five years.

HDFC Hybrid Equity, rated three stars by our MF Star Track system, is a fund worth considering in the aggressive hybrid fund category. We prefer this scheme on account of the above category-average return track record, consistent better-than-index performance and proven downside protection capabilities. The fund manages this courtesy a large-cap dominated equity portfolio and high quality – G Sec/AAA debt strategy bias.

Also read: SBI Equity Hybrid: A consistent performer

About the fund

After SEBI came out with recategorisation norms, HDFC Balanced Fund was merged with HDFC Premier Multi-Cap Fund and the same was renamed HDFC Hybrid Equity Fund from June 1, 2018. So, even in its new avatar, the aggressive hybrid fund has a reasonable five-year track record. The fund assets are predominantly invested in equity and equity-related instruments (65-80 per cent), and the balance (20-35 per cent) in debt instruments.

The fund has managed to deliver returns greater than debt schemes with volatility lower than equity schemes. Within equities, the fund maintains a judicious mix of large-caps (70-90 per cent), mid-caps (5-20 per cent) and small-caps (5-20 per cent). While selecting stocks, the fund follows a bottom-up stock picking strategy, with focus on reasonable quality businesses and prefer companies that are available at acceptable valuations (portfolio PE 23 times versus 32 times category-average).

Within debt, the fund actively manages its average maturity based on the manager’s interest rate outlook. The annualised portfolio yield-to-maturity is 7.57 per cent, while the modified duration is 3.7 years. Consistent rebalancing of asset classes has helped the fund’s cause. The expense ratio of the fund’s direct plan costs 1.09 per cent.

Also read: 3 hybrid funds to tide over market volatality

Returns, portfolio

On a point-to-point basis, HDFC Hybrid Equity has outperformed the category average in the one-, three-, five- and 10-year periods by 1-5 percentage points. It has also outshined its benchmark Nifty 50 Hybrid Composite Debt 65:35 in one-, three-, five- and 10-year periods by 1-5 percentage points by up to 6 percentage points. Only one out of four funds in this category have displayed the consistent ability to better the index’s returns across different time periods. On a financial year basis, the fund has outperformed in 15 out of 21 financial years since 2003.

As the holding period increases, the fund’s return profile improves, consistent with the belief that equities are a long-term asset class. In a three-year investment horizon, more than 10 per cent returns have been generated in 83 per cent of the instances, and in the five-year investment horizon, more than 10 per cent returns have been reported in 90 per cent of the instances. This is based on daily rolling returns since inception.

One of the major reasons why investors prefer aggressive hybrids over pure-equity funds is downside protection capability. On this front, HDFC Hybrid Equity sports a one-year and three-year (monthly) downside capture ratio of 65 per cent, one of the lowest in the category. Do note that this fund, while better at containing declines than pure equity schemes, can show episodes of volatility. As aggressive hybrid funds take exposure to the hilt in equity rallies to generate returns, this means volatility will be heightened, too, in some periods.

Of the fund’s compact 34-stock equity portfolio, the top-10 in terms of allocation are ICICI Bank, HDFC Bank, ITC, RIL, HDFC, Infosys, L&T, SBI, Axis Bank and Power Grid. Compared to its category, the fund is overweight financial, energy, capital goods, construction, while being underweight on automobiles, technology, services, healthcare, chemicals and metals/ mining.

Continuing the trend, the first three months of the equity markets have been volatile, led by growing global uncertainties. However, there are some big positives emerging. One, global interest rates are beginning to trend down, especially at the long end. Two, India’s macro fundamentals are strong. Three, the US dollar is weakening, which could improve global liquidity. On the debt side, interest rates in India have likely hit a peak in this cycle. This makes it a good time for investors to lock into the attractive yields available in the bond markets today. Thus, an aggressive hybrid fund such as HDFC Hybrid Equity makes for a good play in this backdrop.

Why buy
Above category-average return track record
Consistent better-than-index performance
High quality – G Sec/AAA debt strategy bias