Last Updated on December 29, 2021 at 5:00 pm
This week let us take review the performance of HDFC Equity Fund. Currently labelled as a multicap mutual fund with assets of 21,622 Crores, the fund has a long and rich history including frustrating investors with long periods of underperformance. However, the fund seems to have recovered a bit when the last 1-3 year window is considered. Managed by the great Prashant Jain, is this fund still any good? Can current investors continue to hold and buy more? Can new investors consider this? Let us find out.
HDFC Equity Fund: History
The HDFC Equity Fund that we know today started as Centurion Quantum(inception date December 8, 1994). When Centurion sold to Zurich AMC in 1999, the fund became Zurich India Equity Fund. When Zurich sold the fund to HDFC AMC in 2003 it became HDFC Equity Fund. Prashant Jain started managing the fund since June 2003.
Tracing back its history one cannot but chuckle at this April 2001 article by Aarati Krishnan where she says “The small size allows the fund manager considerable flexibility in churning the portfolio, in the event of a reversal in market trends”.
Of course, Prashant Jain has continued to maintain that size is not a problem for any of his funds. This quote from the article is most interesting.
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Way back in 1991, when I started my career, there was no screen-based trading; there were no mobile phones. While travelling, we would stop at a public call booth to check on the markets. Research from brokerages was less and information gathering itself was a major activity. I remember we had tied up with a few scrap paper dealers to sell annual reports to us by the kilo. No company visited us in our office except at the time of public issues. There was no investor relations role in companies. There were no star ratings done on mutual funds. Airfares were less affordable and we were advised to keep travel to a minimum, unlike today, when people have to be prodded to travel more.
No one can dismiss Jain as a “has-been”. I was still in school in 1991 and many reading this would have been in kindergarten. His experience is unmatched and the recent recovery of his funds is a testament. That said, one cannot wait forever for performance as we have goals and needs waiting. Hence an understanding of the scheme and a deeper look is necessary.
HDFC Equity Fund: Nature of the scheme
Prior to May 23 2018, the fund was simply an “Open-ended Growth
Scheme” with an objective to grow capital. Since then it has labelled as a multi-cap “open-ended equity scheme investing across large cap, mid cap & small cap stocks”. The AMC has published a presentation on how the fund has performed across market cycles and how the fund manager has identified growth sectors correctly. This is a screenshot showing the history of large cap exposure.
So this has always been a large cap dominated fund and even by SEBIs definition today can be classified as such. This means that it will tend to disappoint during periods when mid/small caps move up – especially those who take that multi-cap label seriously.
Also, from a scheme that should hold min 80% equity at all times, it now has a mandate like an aggressive hybrid fund – min 65% equity. So much for SEBI fund categorization rules!!
Rolling Return Analysis
We shall now look at every possible 3,5,7,10 and 15 year period since Nov 1998 (the earliest date for which Nifty 500 Total Returns data is available).
Three years (4149 data points)
Five years (3890 data points)
Seven years (3400 data points)
Ten years (2658 data points)
Fifteen years (1427 data points)
Over three years, the fund is typically unlikely to beat its benchmark! For the last few years, the same has been true of five-year and even seven-year rolling returns. It is only over 10 and 15-year windows the outperformance is consistent (although the quantum has dropped). Will you invest in such a fund?
I have also looked SIP rolling returns. Each data point shown below is a five-year SIP return. It would be hard to ignore that the quantum of outperformance has come down.
It is extremely hard for an investor to keep the faith with such a fund manager and assume, things will be okay over ten years or more. Prashant Jain may have skin in the game, but he has extra crores to spare. Do you?
Summary
HDFC Equity Fund has an enviable long time track record. However, short-term frustration and underperformance is the price to pay for this. The direct plan of the fund has a TER of 1.28% – atrociously high considering this is the most popular direct plan fund.
The 3 and 5-year performance for such a high TER is just not good enough. Those who do not mind this and have the patience to wait, along with faith in fund manager can continue to invest in this fund and can also consider it afresh. Others can give it a miss, but which fund will make them happier is another question!
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