HSBC Equity Savings Fund (HESF) has received a two-notch upgrade, moving from three stars to five stars in the latest bl.portfolio mutual fund star rating. The upgrade reflects the fund’s improved risk-adjusted performance over the past 6-12 months. Over the last seven years, the fund has delivered a compounded annualised return of 11.6 per cent. Cautious investors seeking relatively-lower drawdowns and with a two- to four-year investment horizon can consider the fund.
Equity savings funds can offer a tax-efficient investment option for investors with a low to moderate risk appetite. They seek to deliver returns higher-than-conventional fixed income products while limiting the volatility associated with pure equity investments. These hybrid funds typically invest across active equity, arbitrage and debt. The combination of equity and arbitrage exposure is maintained above 65 per cent, allowing them to qualify for equity taxation. This makes the category attractive to conservative investors seeking potentially-better returns than fixed income without taking on the full risk of equity markets.
HESF follows a conservative debt portfolio construction approach combined with selective equity alpha generation. The fund has the flexibility to allocate 15-40 per cent to active equity, while equity plus arbitrage exposure is maintained at a minimum of 65 per cent to qualify for equity taxation. The balance is invested in debt. Broadly, the fund follows a one-third allocation each to active equity, arbitrage and debt, although the proportions can vary depending on market opportunities and the fund manager’s conviction.
Equity strategy
The principal source of alpha is the active equity portfolio, where the fund follows a bottom-up, high-conviction approach. Equity allocation has generally remained in the 30-36 per cent range. The portfolio is constructed across large-, mid- and small-cap stocks, with a major allocation to large- and mid-cap companies.
The fund prefers companies with sustainable growth prospects, sound capital allocation and strong corporate governance. It examines the profit-and-loss statement, including EBITDA margins, to assess pricing power and the ability to pass on cost pressures to customers. Balance-sheet strength and cash-flow generation are also important indicators of business health, with particular attention paid to working capital ratios. Valuation is considered towards the end of the process, primarily using relative P/E and EV/EBITDA measures.
Three broad themes currently stand out in the fund’s equity strategy. The first is financials, particularly financial penetration and capital markets. The second is manufacturing, supported by government initiatives such as Atmanirbhar Bharat, Production Linked Incentive schemes, and policies covering semiconductors and electronics. The third is domestic discretionary consumption.
Banks, finance and capital markets are among the fund’s top sectoral bets. Over the last year, it increased allocation to banks, automobiles and capital markets, while reducing exposure to industrial manufacturing, retailing and pharmaceuticals.
Arbitrage: The arbitrage team independently identifies opportunities arising from spreads between the cash and derivatives markets and takes positions based on available monthly spreads. The arbitrage manager does not consider stocks held by the equity team while constructing the arbitrage portfolio.
Debt strategy: The debt portfolio is managed with a clear focus on capital preservation and income generation rather than alpha generation. Over the last five years, the fund has invested only in government securities and AAA-rated corporate bonds, thereby avoiding credit risk and limiting exposure to significant duration risk. Most debt investments have a maturity profile of around one to two years.
The fund therefore does not seek to generate additional returns through aggressive calls on either credit quality or interest-rate duration. Its Macaulay duration has ranged between 1.9 and 3.3 years. Major corporate bond holdings include issuers such as Reliance Industries, NABARD and Small Industries Development Bank of India.
Performance
The fund’s performance has been consistent on a rolling-return basis. Over the past seven years, its five-year rolling returns averaged 12.7 per cent CAGR, compared with 9.7 per cent for the category. During this period, five-year returns ranged between 10.3 per cent and 16 per cent.
On a three-year rolling-return basis, the fund delivered a 12.5 per cent CAGR, compared with 9.6 per cent for the category average.
The regular plan carries an expense ratio of 1.29 per cent, lower than the category average of 1.48 per cent. The direct plan’s expense ratio is 0.57 per cent, compared with 0.62 per cent for the category.
Overall, the fund can be considered by conservative investors looking for a relatively stable hybrid allocation over a two- to four-year period.
Published on August 22, 2026
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