HDFC Flexi Cap Fund: Unlocking the Potential of Fundamentally Strong Stocks

The erstwhile HDFC Equity Fund, now known as HDFC Flexi Cap Fund, holds the distinction of being among the pioneering schemes in the Flexi Cap Fund category. Incepted in January 1995, the fund has demonstrated an impressive CAGR of approximately 19%, with its AUM soaring to a substantial Rs 64,929 crore. Originally structured as a Multi Cap fund with a preference for large caps, HDFC Flexi Cap Fund underwent a reclassification in January 2021, transforming into a Flexi Cap Fund to adhere to SEBI's revised category definition. Notably, the fund has constantly employed a dynamic investment approach, allocating across market caps depending on the available opportunities, but with a bias towards large caps. Consequently, the transition to a Flexi Cap fund category did not have any impact on the underlying investment philosophy of the scheme.

HDFC Flexi Cap Fund adopts a blend of growth and value-driven investment strategies and avoids taking position on momentum-driven bets, even if it results in short-term underperformance. The fund encountered challenges during two periods: 2015-16 and from 2019 to 2020. These challenges were primarily attributed to its heightened exposure to high-conviction bets on Infotech, Engineering, and PSU stocks, which fell out of favour during these periods. Nonetheless, the fund experienced a resurgence as its investments in PSUs, Infotech, Pharma, and Engineering sectors thrived in the latter half of 2020. Moreover, its significant exposure to Banking & Finance stocks enabled it to benefit from the robust growth in the segment. As a result, it now stands among the top quartile performers in the category across various time frames.

Over the last five years, HDFC Flexi Cap Fund has demonstrated a CAGR of approximately 23.3%, outperforming its benchmark Nifty 500 - TRI, which grew at a rate of about 19%. An initial investment of Rs 10,000 in HDFC Flexi Cap Fund five years ago would have now been valued at Rs 28,531 surpassing the benchmark's valuation of Rs 23,843 for a similar investment over the same period.

While HDFC Flexi Cap Fund has a commendable long-term performance history, it has encountered periods of short to medium-term underperformances. On a rolling return basis, over the last 2-years and 3-years, the fund has delivered an impressive CAGR of around 29.7% and 26.9%, surpassing both its benchmark and the category average by a substantial margin of around 6-8 percentage points CAGR. Notably, many of its prominent peers have struggled to match the benchmark performance during this period. Its extraordinary performance in recent years has significantly improved its long-term returns as well, positioning it among the top quartile performers in the category across various time frames while also generating noticeable alpha over the benchmark.

HDFC Flexi Cap Fund has exhibited lower volatility than the category average and the benchmark. Moreover, it has adequately rewarded its investors by recording higher risk-adjusted returns, as reflected in its superior Sharpe ratio of 0.35, which significantly exceeds that of the benchmark, and is currently among the best in the category.

[Read: Flexi Cap Funds v/s Multi Cap Funds: Which Is Better at a Market High?]

What is the investment strategy of HDFC Flexi Cap Fund?

Categorised as a Flexi Cap Fund, HDFC Flexi Cap Fund is mandated to invest at least 65% of its assets in Indian equities. It has the flexibility to invest without any market cap or sector restriction. Accordingly, it aims to create a diversified portfolio spread across major industries, economic sectors, and market capitalization that offer an acceptable risk-reward balance. HDFC Flexi Cap Fund follows a blend of growth and value styles of investing to generate optimal returns. The scheme predominantly invests in companies that:

a) Are likely to achieve above-average growth

b) Enjoy distinct competitive advantages, and

c) Have superior financial strength

HDFC Flexi Cap Fund maintains a large-cap biased portfolio wherein it invests 70-85% of its assets, with the remaining in mid-cap and small-cap stocks. The fund has high conviction in most of the stocks in its portfolio and holds them with a long-term view. Accordingly, it has recorded a low turnover ratio of about 30-40% in the last two years.

HDFC Flexi Cap Fund usually holds around 45-55 stocks spread across market caps and sectors. As of October 31, 2024, the fund held a compact portfolio of 50 stocks with the top 10 stocks accounting for about 56.6% of its assets. Popular large-cap names such as ICICI Bank, HDFC Bank, Axis Bank, Cipla, and Kotak Mahindra Bank currently form part of its top holdings. SBI Life Insurance Company, Maruti Suzuki India, Bharti Airtel, HCL Technologies, and Piramal Pharma are among the other stocks that form part of the fund's top 10 holdings. The fund has limited the exposure to individual stocks in the mid-cap and small-cap segments to under 3%.

In the last two years, HDFC Flexi Cap Fund benefitted the most from its holdings in Hindustan Aeronautics, Bharti Airtel, ICICI Bank, L&T, Mahindra & Mahindra, SBI, HCL Technologies, and Lupin which together contributed nearly 28% to its absolute gains. Kalpataru Projects International, Bank of Baroda, HDFC Bank, Infosys, Axis Bank, SBI Life Insurance Company, and Tech Mahindra were among the other top contributors to its gains. Meanwhile, it booked profit in BEML Land Assets, Coforge, Interglobe Aviation, ONGC, and NTPC, among others.

In terms of sectors, HDFC Flexi Cap Fund's portfolio is skewed towards Banking & Finance stocks that collectively form around 39.5% of its assets. It holds substantial allocations in Auto & Auto Ancillaries, Pharma, and Infotech that form another 28.6% of its assets. The fund also holds diversification to Telecom, Healthcare, Consumption, and Engineering, among others. Its portfolio has a well-balanced allocation to cyclical, defensive, and sensitive sectors.

Is HDFC Flexi Cap Fund suitable for my investment goals and risk tolerance?

HDFC Flexi Cap Fund has staged an impressive turnaround in recent years, reclaiming its position among the top performers in the Flexi Cap Fund category. While it may not excel during bear markets, the fund's performance shines in bullish market phases, offering investors attractive rewards over complete market cycles.

Due to its high-conviction approach, HDFC Flexi Cap Fund might experience periods of underperformance in the short to medium term, particularly when its high-conviction bets are out of favour, or during momentum-driven market upswings. However, its focus on creating a well-diversified portfolio of fundamentally sound stocks positions it for potential recovery with superior gains during bull phases. Notably, the fund has established a dependable track record of delivering reasonable risk-adjusted returns over extended time frames.

HDFC Flexi Cap Fund is suitable for investors seeking a Flexi Cap Fund focused on selecting high-conviction stocks with an investment horizon of at least 5 to 7 years.

Watch this video to find out the top Flexi Cap Funds with highest SIP returns:

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. 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 investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

We are on Telegram! Join thousands of like-minded investors and our editors right now.

DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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 the 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, its subsidiaries and its Directors.

Terms and condition on which its offer research report

For the terms and condition for research report click here.

Details of associates

• Group Companies including:

  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;

  7. HelpYourNGO.com India Private Limited;

  8. HelpYourNGO Foundation;

  9. Natural Streets for Performing Arts Foundation;

  10. Primary Real Estate Advisors Private Limited;

  11. HYNGO India Private Limited;

• Directors of the Company - Suresh Lulla; I V Subramaniam, Murali Ananthan Krishnan and Rafiq Dossani

1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company;

3. 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;

4. 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.

1. Neither QIS nor it's Associates have received any compensation from the subject Company in the past twelve months;

2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company;

3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company;

4. Neither QIS nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report

1. The Research Analyst has not served as an officer, director or employee of the subject Company.

2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

Click here to read PersonalFN's Mutual Fund Rating Methodology

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. & 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 SEBI-registered Investment Adviser. Registration No. INA000000680, SEBI (Investment Advisers) Regulation, 2013 & BASL Membership Id: 1488

Investment in securities market are subject to market risks, read all scheme related documents carefully.