HSBC Equity Savings Fund Gets Two-Notch Rating Upgrade

HSBC Equity Savings Fund (HESF) jumped two notches to a five-star rating in the latest bl.portfolio mutual fund star rating, the publication said. The upgrade reflects improved risk-adjusted performance over the past six to 12 months.

Over seven years, the fund has delivered an annualized return of 11.6%, according to the rating note. The fund targets conservative investors seeking lower drawdowns with a two- to four-year horizon.

HESF splits its holdings between active equity and arbitrage, with the balance in debt. The equity-plus-arbitrage exposure stays above 65% to qualify for equity taxation. The fund typically allocates roughly one-third each to active equity and arbitrage, the rest to debt, though proportions shift depending on market opportunities and the manager's conviction.

The active equity portfolio, the main source of alpha, follows a bottom-up, high-conviction approach. Equity allocation has generally stayed in the 30%-36% range. The fund favors large- and mid-cap stocks with sustainable growth, sound capital allocation, and strong governance. The managers examine EBITDA margins, balance-sheet strength, and cash-flow generation, with working capital ratios a particular focus. Valuation is considered last, mostly through relative P/E and EV/EBITDA.

Three broad themes guide the equity strategy: financials (especially financial penetration and capital markets), manufacturing (supported by government initiatives like Atmanirbhar Bharat and PLI schemes), and domestic discretionary consumption. Over the past year, the fund increased allocation to banks, automobiles, and capital markets while reducing industrial manufacturing, retailing, and pharmaceuticals.

Arbitrage is handled independently. The arbitrage team identifies opportunities from cash-derivatives spreads and takes positions based on monthly spreads, without considering stocks held by the equity team.

The debt portfolio focuses on capital preservation and income, avoiding aggressive credit or duration bets. Over the past five years, the fund has invested only in government securities and AAA-rated corporate bonds. Most debt investments mature in one to two years. Macaulay duration has ranged between 1.9 and 3.3 years. Major corporate bond holdings include Reliance Industries, NABARD, and Small Industries Development Bank of India.

Performance has been consistent on a rolling-return basis. Over seven years, the five-year rolling returns averaged 12.7% CAGR, versus 9.7% for the category. The three-year rolling returns averaged 12.5% CAGR, compared with 9.6% for the category.

The regular plan carries an expense ratio of 1.29%, lower than the category average of 1.48%. The direct plan's expense ratio is 0.57%, below the category average of 0.62%.