Why HDFC Hybrid Equity is a good investment

Investors with over three-year horizon can buy the units of HDFC Hybrid Equity (formerly known as HDFC Balanced).

With equity indices at all-time highs, it is prudent to take a balanced stance at this juncture and invest in the aggressive hybrid fund category which could provide some downside protection. These funds can invest 65-80 per cent of their assets in equity and 20-35 per cent in debt and money market instruments. HDFC Hybrid Equity seems a good choice on account of its two-decade track record, sustained outperformance over category as well as benchmark across time periods, and ability to navigate market ups and downs. Investors can also invest in the fund through the systematic investment plan (SIP) route to mitigate market volatility.

Performance

HDFC Hybrid Equity is a veteran fund that has been in existence over the past two decades. It has delivered CAGR of 15.7 per cent since its launch in September 2000, when its additional benchmark Nifty 50 rose 13.64 per cent. Over the past ten years, the fund has delivered annualised returns of 14.6 per cent, outperforming the aggressive hybrid category average return of 13.3 per cent.

Across various time frames of one-, three- and five-year periods, HDFC Hybrid Equity has outpaced the category average returns.. In the past one year, the fund has outpaced some of its peers, namely SBI Equity Hybrid and Canara Robeco Equity Hybrid. The fund’s year-to-date performance is in line with the category average return of 18.9 per cent.

It being an aggressive hybrid fund, the scheme’s returns could, in the short term, be marginally lower sometimes than pure equity funds, which remain fully invested. However, during downtrends, funds such as HDFC Hybrid Equity decline relatively less (downside capture ratio of 77.13), limiting the downside.

The fund has managed to contain downside during the 2011, 2015 and 2018 market corrections. On the other hand, during the bull markets - for instance in 2014 and 2018 - it outperformed the category average returns.

Strategy

The fund broadly targets returns greater than debt schemes with lower volatility than equity schemes. Within equities, the fund has the flexibility to invest across market capitalisation. While selecting stocks, the fund follows a bottom-up stock picking strategy, and maintains a balanced mix between consumption and investment themes in its portfolio. Within debt, the fund actively manages its average maturity based on the manager’s interest rate outlook. A scheme with an equity corpus of 65 per cent and above is considered equity-oriented for taxation purposes.

After its equity exposure hit a near-term low of 64.9 per cent in March 2020, HDFC Hybrid Equity gradually upped allocation to a high of 75 per cent in December 2020. It currently retains equity exposure at around 72 per cent. The fund has a diversified equity portfolio with 38 stocks and adopts a blend of value and growth strategy. Top-five stock holdings account for about 26 per cent of the allocation, while top three sectors account for about 41 per cent of weight.

To diversify risks from high individual stock weights, HDFC Hybrid Equity keeps individual allocation to less than 4 per cent beyond the top four stocks. Within the overall equity allocation, large-cap stocks take a big chuck of the portfolio with 52.9 per cent, followed by small-caps with 11 per cent allocation while 6.8 per cent is invested in mid-caps.

Banks and software are the top two preferred sectors with 21 per cent and 7 per cent allocation respectively. The fund recently trimmed the allocation in construction projects to 4.3 per cent and finance sector to 4.27 per cent compared with December 2020 holdings of 6 per cent and 7.9 per cent respectively. But it has marginally upped allocations in industrial products and trading sectors. The fund’s top holdings, namely ICICI Bank, Infosys, HDFC Bank, Reliance Industries, Larsen & Toubro and HDFC, have clocked good returns over the past one year.

In recent times, the fund has increased the allocation slightly in mid- and small-cap stocks such as Bharat Electronics, Redington India, SKF India, Mahindra Holidays & Resorts India and Vardhman Textiles. On the debt side, the average credit rating is AAA for its holdings. Average maturity is nearly 2.6 years, with yield to maturity of around 5 per cent.

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