Debt Core – Equity Edge
There are few investors who want better returns than Fixed Deposit but don’t want volatility of Equity. HDFC debt hybrid fund is suitable for these investors. Conservative Hybrid funds cater to investors who prioritize capital stability but still seek limited equity exposure for investment growth. By regulation, these funds allocate about 75-90 % of assets to Debt instruments and 10-25 % to Equities, making them predominantly debt – oriented. The debt component provides a steady foundation while the equity portion enhances long term return potential.
In recent budgets, conservative hybrid funds (CHF) have lost the earlier capital gains take concessions and indexation benefits. Gains are now taxed at the investor’s applicable income tax slabs, similar to interest earned to bank deposits.
Despite the tax revisions, these funds remain relevant for conservative investors, especially retirees or those earning around rupees 12 Lakh annually, who fall under low or nil tax brackets and prefer regular income to cover living expenses. A systematic withdrawal plan (SWP) in these funds can serve as an effective way to generate steady cash flow.
Debt Portfolio
On debt side, which forms the larger portion of the portfolio, the fund follows an active strategy focused on optimizing credit spreads asset classes and maturity profiles. It is among the few funds in the category that take moderate to high duration calls based on the interest rate outlook. As of now, the average maturity of the portfolio is around 11.9 years – the second highest among peers as the fund management team expects interest rates to soften going ahead.
The allocation to government securities increased from 20% to 30% over the last year, driven primarily by narrow spreads between sovereign and high rated corporate bonds. Currently around 33% of the fund is in AAA corporate bonds and about 7 % in AA rated papers.
Over past 5 years the allocation to AA rated papers was as high as 34% . Risk evaluation is guided by a proprietary internal model based on four Cs of credit. Character, capacity, collateral and convenants. “Character” reflects integrity and reputation of the borrowing companies’ management, helping the fund avoid exposure to mismanaged firms. “Capacity” assesses the company’s ability to generate sufficient cashflows to repay its debt obligation. “Collateral” ensures adequate security backing for loans, protecting investors capital in the event of default. “Convenants” refer to contractual safeguards built into debt agreements that keeps borrower within defined financial and operational limits.
The framework is further supported by internal scoring models that company parentage, financial strength and external credit ratings.
Equity Strategy
The equity allocation complements the debt portion by providing growth potential. HHDF has maintained an Equity allocation between 19 and 25% over past five years adjusting dynamically to market conditions. The equity strategy focuses on investing in quality businesses at reasonable valuations. Currently fund has overweight positions in health care and financial sectors while remaining underweight in materials.
Performance
A three-year rolling returns analysis over the last seven years shows average annualized return of 10.7% versus category average of 8.8% with returns ranging between 7.6% and 14.2% as of August 2025.
The fund suits investors with short to medium term goals, typically over three to five years. Who aim for returns slightly above fixed income instruments while avoiding the volatility associated with full equity exposure.
Blog by Mr. Santosh G Akerkar for Educational and Knowledge purposes only.
Best Regards,
Santosh Akerkar
