Traditionally a flexi-style fund, it has always had the privilege to switch market cap exposure depending on available opportunities. However, the fund preferred to be inclined more towards large caps along with significant exposure to mid-caps. Keeping in mind the fund's historical strategy, the fund house has classified HDFC Equity Fund under Multi-cap Funds category, which allows it to diversify across market caps without limitations to any specific segment. This is very much in line with its historical investment style.

An offering from India's largest fund house, HDFC Mutual Fund, known for its investment systems and processes and with a well seasoned fund manager like Prashant Jain at the helm, HDFC Equity Fund can be easily entrusted with investors' money. However, the fund has clearly disappointed its investors over the last few years with sub-standard returns compared to its peers. Over a 3-year rolling return basis, HDFC Equity Fund has not only lagged behind on the category average but also its benchmark, the Nifty 500 - TRI Index. Moreover, the excess volatility seen in the fund's performance raises concern about its consistency and stability.

Having an objective to generate capital appreciation / income from a portfolio, predominantly invested in equity & equity related instruments, HDFC Equity Fund carries a weightage of at least 70% into large caps, with about a quarter of its portfolio in mid-cap stocks. Driven by the conviction of its fund manager, the fund has in the past managed to reward investors with a higher risk appetite and a longer time horizon.

Fund Facts – HDFC Equity Fund

Category	Multi Cap Fund	Style	Blend
Type	Open ended scheme	Market Cap Bias	Multi Cap Fund
Launch Date	2-Jan-95	SI Return (CAGR)	19.22%
Corpus (Cr)	Rs 20,352	Min./Add. Inv.	Rs 5,000 / Rs 1,000
Expense Ratio (Dir/Reg)	0.96% / 1.96%	Exit Load	1%

Portfolio Data as on June 30, 2018.
SI Return as on July 31, 2018.
(Source: ACE MF)

Growth Of Rs 10,000, If Invested In HDFC Equity Fund 5 Years Ago

HDFC Equity Fund: Year-on-Year Performance

HDFC Equity Fund: Performance Vis-à-vis Category Peers

Scheme Name	Corpus (Rs Cr)	1 Year (%)	2 Year (%)	3 Year (%)	5 Year (%)	Std Dev	Sharpe
Motilal Oswal Multicap 35 Fund	13,016	24.92	24.64	20.63	--	14.33	0.14
SBI Magnum Multicap Fund	5,413	21.24	20.59	16.39	22.14	13.14	0.13
Principal Multi Cap Growth Fund	661	26.68	25.21	16.29	22.24	16.60	0.12
Aditya Birla SL Equity Fund	9,351	19.24	23.22	16.28	23.17	13.70	0.14
Invesco India Multicap Fund	524	23.65	21.23	15.86	26.24	15.27	0.10
Kotak Standard Multicap Fund	19,827	20.01	21.33	15.70	22.11	12.75	0.15
Mirae Asset India Equity Fund	7,945	22.41	21.75	15.22	21.98	13.36	0.14
BNP Paribas Multi Cap Fund	854	23.02	20.18	14.64	20.45	14.39	0.06
Parag Parikh Long Term Equity Fund	1,107	21.23	17.77	13.98	20.04	10.07	0.19
Edelweiss Multi-Cap Fund	87	25.99	21.21	13.46	--	14.94	0.11
ICICI Pru Multicap Fund	2,753	14.83	17.85	13.10	19.69	12.27	0.10
Franklin India Equity Fund	11,470	16.58	16.04	12.77	20.04	11.76	0.07
DSPBR Equity Fund	2,503	19.81	19.88	12.51	18.68	15.15	0.08
HSBC Multi Cap Equity Fund	612	19.53	19.55	12.31	20.37	14.81	0.07
IDFC Multi Cap Fund	5,484	18.75	15.53	11.94	20.80	13.75	0.04
IDBI Diversified Equity Fund	363	18.00	14.41	11.49	--	12.28	0.05
L&T Equity Fund	2,689	19.10	17.88	11.47	18.55	13.42	0.07
HDFC Equity Fund	20,352	19.03	19.99	10.89	18.07	16.62	0.05
Baroda Pioneer Multi Cap Fund	673	17.42	16.67	10.34	16.25	13.51	0.02
UTI Equity Fund	7,986	18.14	15.13	10.22	17.38	12.48	0.11
Canara Rob Equity Diver Fund	852	21.39	17.48	10.14	15.79	14.40	0.06
Reliance Multi Cap Fund	9,270	20.02	14.98	9.14	18.06	14.93	-0.01
Taurus Starshare (Multi Cap) Fund	210	15.73	15.11	8.72	14.43	14.60	-0.01
Union Equity Fund	212	14.72	13.83	6.35	12.86	13.03	0.00
LIC MF Multi Cap Fund	264	10.98	11.04	4.70	11.90	15.45	-0.05
NIFTY 500 - TRI		20.81	19.09	11.75	16.40	13.30	0.10

Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised.
Data as on July 31, 2018
(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.

HDFC Equity Fund has turned out to be a below average performer. Although the fund has managed to beat the benchmark over longer time periods of 5 years, it has failed to deliver over shorter rolling periods of up to 3 years. Moreover, the fund has lost its spot of being a top quartile category performer. HDFC Equity Fund's standard deviation of over 16% is one of the highest in the category, which raises doubt about its risk management strategies; while its Risk Adjusted Return (Sharpe Ratio) is nothing to boast of. It clearly signifies that the conviction of the fund manager has not really worked for the fund in the last few years. In fact the fund manager needs to focus on controlling the excess volatility encountered by the fund, which results in higher risk for its investors.  

Investment Strategy of HDFC Equity Fund

Classified under multi-cap funds, HDFC Equity Fund holds mandate to invest across market caps. However, the fund holds a predominantly large cap portfolio with dynamic allocation to mid caps. While picking stocks, the fund gives high preference to strong & growing companies that could not only survive, but emerge stronger in challenging times. Moreover, the fund's portfolio remains diversified across key sectors, with focus being on stocks and sectors where the fund manager has high conviction. HDFC Equity Fund fund largely follows a blend of growth and value style of investing and does not churn its portfolio often. It prefers to remain fully invested into equities and does not take any aggressive cash calls.

In terms of stock picking, HDFC Equity Fund is driven by processes and depends predominantly on bottom up approach to pick quality stocks for its portfolio. The fund usually follows buy and hold investment strategy, where the fund manager sticks to his conviction irrespective of themes that become the short-term flavour of the markets.

HDFC Equity Fund - Portfolio Allocation and Market Capitalisation Trends

Given its huge size of over Rs 20,000 crore, HDFC Equity Fund lacks flexibility to quickly shift its portfolio allocation. Over the past year or so, the market cap allocation has remained almost steady. The exposure to large-caps has remained around 80% while mid and small caps have been below the 20% mark. Over the last 6 months the funds allocation to midcaps has slighlty shifted towards large caps. This is probably due to the rally in the large cap space, while the mid caps have corrected significantly. The cash levels have remained below 3% for most part of the year. Despite holding a portfolio with high large-cap allocation, HDFC Equity Fund has failed to keep its volatility under check. The funds high volatility is mainly because of its concentration to a specific set of sectors and stocks, and not being truly diversified.

HDFC Equity Fund – Top Portfolio Holdings

Top 10 Stocks Stocks % of Assets State Bank Of India 9.56 Infosys Ltd. 9.41 ICICI Bank Ltd. 8.91 Larsen & Toubro Ltd. 8.32 Reliance Industries Ltd. 5.46 HDFC Bank Ltd. 4.92 NTPC Ltd. 3.23 ITC Ltd. 3.18 Power Grid Corp. Of India Ltd. 2.80 GAIL (India) Ltd. 2.68	Top 5 Sectors
Holdings (in %) as on June 30, 2018 (Source: ACEMF)

As on June 30, 2018, HDFC Equity Fund's portfolio was invested over 49 stocks. The fund's portfolio is skewed towards stocks where the fund manager holds high conviction. Stocks like State Bank of India, Infosys, ICICI Bank and Larsen & Toubro, carry an exposure of over 8% each and together account to about 36% of the assets. Reliance Industries and HDFC Bank are the other two stocks in the portfolio where the exposure is about 5% each. The top 5 and top 10 holdings in the fund's portfolio account for 42% and 59% of its assets respectively, which may result in high concentration risk and volatility if any of its top pick is out of favour or changes tide.

Clearly, banks lead the list of sectors with an allocation of 30%, while NBFCs account for another 4% in the portfolio, together allocating one third portion of the fund's portfolio into financials. I.T., Industrial Capital Goods and Power stocks follow behind with an allocation of over 10% each. Petroleum sector stocks gain an allocation of about 7%. Around 75% of the fund's portfolio is currently exposed to these 5 sectors.

Major Gainers: Over the last one year, stocks like Avenue Supermarts, TCS, Reliance Industries and Infosys have been among the top performers in the funds portfolio, gaining over 40% in value.

Major Losers: On the other hand, KSK Energy Ventures, Gammon Infrastructure, Hindustan Construction Co., Siti Networks, BEML, Oriental Bank Of Commerce and Punjab National Bank, are among the stocks present in the fund’s portfolio, that lost over 40% in value.

Suitability of HDFC Equity Fund

Multi cap funds provide the benefit of diversification across market caps. In the absence of any limit on market cap segment, HDFC Equity Fund may not carry equal weightage to each market cap segment. It is expected to operate more like a pre-dominant large cap fund. While its focus towards large cap stocks may help during turbulent market conditions, its concentrated bets into few selected stocks and sectors could lead to additional volatility and lower returns if the stocks don’t perform as per the fund manager’s expectations or if any of the underlying themes remain out of favour. The fund has shown tendency to underperform its peers as well as the benchmark during extreme market conditions.

The aggressive investment strategy followed by HDFC Equity Fund makes it suitable only for investors who are willing to consider higher risk and ignore short term underperformance, while keeping patience with the fund for long term growth.

If you a long term investor looking for a solid wealth-building portfolio for the next 7-8 years, we might have a perfect solution for you. It is based on a time-tested investment strategy favored by most of successful investors to create wealth consistently over years. We call it the ‘Core + Satellite’ strategy.

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Note: This write up is for information purpose and not a recommendation to buy or sell the mutual fund scheme. 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 financial planner or investment advisor.

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DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014  

About the Company including business activity 

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989. 

QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services. 

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, it subsidiaries and its Directors. 

and condition on which its offer research report. For the terms and condition for research report click here.

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1. Money Simplified Services Private Limited;
2. PersonalFN Insurance Services India Private Limited;
3. Equitymaster Agora Research Private Limited;
4. Common Sense Living Private Limited;
5. Quantum Advisors Private Limited;
6. Quantum Asset Management Company Private Limited;
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10. Primary Real Estate Advisors Private Limited;
11. Rahul Goel;
12. I V Subramaniam.

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1. Neither QIS, it’s Associates, Research Analyst or his/her relative have any financial interest in the subject Company , except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF.
2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
3. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices

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Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021. Email: info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222

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