HDFC Equity Savings Fund (HESF) has been upgraded to a four-star rating in the latest edition of the bl.portfolio MF Star Track Ratings, after holding a three-star rating over the previous two years. The upgrade reflects a marked improvement in its risk-adjusted performance within the category. It currently manages assets of Rs 5,576 crore as of March 2026.

Positioned within the equity savings segment, HESF offers a relatively tax-efficient avenue for investors with a low-to-moderate risk appetite. Funds in this hybrid category typically split their portfolios into roughly 30–35 per cent each across equities, arbitrage positions, and debt. With arbitrage and equity together accounting for over 65 per cent exposure to equity instruments, these funds qualify for favourable equity taxation. This in turn makes them appealing to conservative investors seeking returns superior to fixed income without taking on significant market risk.

Equity strategy

HESF allocates broadly equally across equity, arbitrage, and debt over most time frames. On the equity side, the fund maintains a fairly stable allocation, typically within a narrow band of 35–40 per cent. However, tactical adjustments are made when valuations appear stretched or unusually attractive. For instance, between June and October 2024, when market valuations were considered expensive, the fund reduced equity exposure to about 30–32 per cent before increasing it again to around 35–37 per cent following a market correction.

Stock selection is primarily driven by a bottom-up approach, with a focus on earnings growth and reasonable valuations. The equity portfolio is predominantly large-cap oriented. Over the last five years, large-cap allocation within the equity portion has ranged between 83 and 93 per cent. As per the latest overall portfolio, allocation to large-, mid-, and small-cap stocks stood at 59 per cent, 3 per cent, and 4 per cent respectively as of March 2026.

Sector allocations are dynamic. Currently, the fund has relatively higher exposure to financials, consumer discretionary, and select healthcare segments, while materials, energy, and staples remain relatively underweight. The top three sectors as of March 2026 were banks (16 per cent), petroleum products (6 per cent), and pharma (6 per cent). Over the past year, the fund increased allocation to pharma, power, and construction by over one percentage point each, while reducing exposure to IT, banks, and beverages by 1–2 percentage points.

Arbitrage strategy

The arbitrage component plays a stabilising role in the portfolio, providing relatively low-risk returns while helping maintain the equity-oriented tax structure. Arbitrage exposure is typically maintained in the 21–33 per cent range, complementing equity allocation to achieve a gross equity exposure of around 65–68 per cent. The strategy focusses on capturing price differentials between cash and derivatives markets, with most opportunities arising at the stock level rather than the index level.

Debt strategy

Flexibility in debt allocation is limited by the need to retain equity taxation benefits, and allocation generally remains within the 25–35 per cent range. The debt portfolio is managed like a short-duration fund, with Macaulay duration ranging between 2 and 3.4 years over the past three years.

It is largely invested in high-quality instruments, with a strong preference for AAA-rated corporate bonds, while a smaller portion is allocated to government securities to support arbitrage margin requirements. As per the current portfolio, about 12 per cent is invested in AAA-rated corporate bonds and around 2.5 per cent in AA+ rated bonds, including Cholamandalam Investment & Finance and Muthoot Finance. About 9 per cent of the portfolio is invested in government securities. As of March 2026, the fund’s debt portfolio reported a yield to maturity of 7.3 per cent, compared with the category average of 7.1 per cent.

Performance

Recent outperformance was supported by timely sector allocation, with strong contributions from select industrials, fertilisers, and metals, including Hindalco Industries, Kalpataru Projects International, Paradeep Phosphates, and Tata Steel.

Five-year rolling returns over the past seven years show that the fund delivered an average annual return of 11.5 per cent, outperforming the category average of 10 per cent. The five-year return range has varied between 8.7 per cent and 14.9 per cent. The fund also demonstrated decent performance in three-year rolling returns, delivering an 11 per cent CAGR compared with the category average of 9.6 per cent.

From a cost perspective, the regular plan has an expense ratio of 1.89 per cent, slightly higher than the category average of 1.8 per cent. The direct plan’s expense ratio stands at 0.95 per cent, above the category average of 0.8 per cent.

This fund is suited for cautious investors, retirees seeking lower drawdowns, and those looking to park surplus funds for two to four years while benefiting from equity taxation.

Published on May 2, 2026