HDFC Equity: Invest

HDFC Equity is a good option for a core portfolio, given its impressive track record. Although the fund’s assets size has grown substantially over the years it continues to deliver returns far better than its benchmark.

Over three and five-year periods, the fund delivered 13 and 9 per cent, respectively, and bettered its benchmark CNX 500 by nine and six percentage points. The fund has stepped up exposure to mid-cap stocks, but has maintained its risk profile. Its risk-adjusted return is far better than large-cap funds such as Franklin India Bluechip and Birla Sun Life Frontline Equity.

Over shorter time frames, HDFC Equity has trailed its peers. But this was mainly on account of its conservative stock selection or lower exposure to the market favourite sectors. For instance, the fund trailed its benchmark along with the CNX Nifty during the infrastructure-driven rally in 2007. But its lower exposure to the sector helped it contain losses far better than the others subsequently.

Its conviction to stay invested throughout the corrective phase in 2008 also helped it to bounce back, outpacing its benchmark by 30 percentage points in 2009. Hence, non-participation in a particular sector did not really hurt the fund in the long run.

In the past five years the fund unfailingly contained downsides better than its benchmark during most market falls. On a monthly rolling return basis over the last five years, it has surpassed its benchmark seven out of ten times.

Given the market volatility, investors with a five-year horizon can consider exposure to HDFC Equity. The volatile nature of the equity market and the fund’s exposure to mid-sized companies, albeit limited, may warrant investors staggering investments. Hence we recommend a SIP approach to investing in HDFC Equity. A five-year SIP, for instance, delivered 12.9 per cent against 5 per cent delivered by its benchmark.

Performance

The fund NAV lost 9 per cent over the last one year and marginally underperformed its benchmark. Over the same period, Franklin India Bluechip shed four per cent. Being fully invested could be one of the reasons for the underperformance.

The past few years’ rally in the FMCG sector appears to have forced the fund to review its exposure to the sector. The fund lowered exposure to FMCG rather early, and the strategy failed to work. This could be another reason for lacklustre performance. But in recent months, the fund has once again gradually increased exposure to the sector, given the defensive approach that the market is still holding on to.

Portfolio Overview

The fund invested 80 per cent of its assets in 30 stocks. The top ten stocks accounted for 40 per cent of the assets. In recent months, the stock of SBI alone accounted for 9 per cent of the assets.

The top three sectors, banks, software and consumer non-durables, accounted for 40 per cent of the portfolio. The fund has consistently been overweight on the banking sector for the last two years.

Over two-thirds of the fund's portfolio is invested in large-cap stocks (market capitalisation more than Rs 7,500 crore), with mid-cap and other smaller stocks making up over 13 per cent and 19 per cent, respectively.

The fund is managed by Mr Prashant Jain.

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