Conservative Hybrid Funds (CHFs) cater to investors who prioritise capital stability but still seek limited equity exposure for incremental growth. By regulation, these funds allocate about 75–90 per cent of assets to debt instruments and 10–25 per cent 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, CHFs have lost the earlier capital gains tax concessions and indexation benefits. Consequently, gains are now taxed at the investor’s applicable income tax slab, similar to interest earned on bank deposits. Dividends distributed by these funds are also taxed as per the investor’s slab rate.
Despite the tax revisions, these funds remain relevant for conservative investors, especially retirees or those earning up to ₹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 flows.
Among the better performers in this category is the HDFC Hybrid Debt Fund (HHDF), which has delivered a compounded annual return of 8.8 per cent over the past 10 years. Launched in 2003 and earlier known as the HDFC Monthly Income Plan, it has a strong performance track record.
Debt portfolio
On the debt side, which forms the larger portion of the portfolio, the fund follows an active strategy focused on optimising 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 hybrid funds — as the fund management team expects interest rates to soften going ahead. The allocation to government securities increased from 26 per cent to 36 per cent over the last year, driven primarily by narrow spreads between sovereign and high-rated corporate bonds. Currently, around 33 per cent of the fund is in AAA-rated corporate bonds, and about 7 per cent in AA-rated papers.
Over the past five years, the allocation to AA-rated papers was as high as 34 per cent. Risk evaluation in the debt portfolio is guided by a proprietary internal model based on the “four Cs of credit”: Character, Capacity, Collateral, and Covenants. “Character” reflects the integrity and reputation of the borrowing company’s management, helping the fund avoid exposure to mismanaged firms. “Capacity” assesses the company’s ability to generate sufficient cash flows to repay its debt obligations. “Collateral” ensures adequate security backing for loans, protecting investors’ capital in the event of default. “Covenants” refer to contractual safeguards built into debt agreements that keep borrower behaviour within defined financial and operational limits.
This framework is further supported by an internal scoring model that considers company parentage, financial strength, and external credit ratings. Each company is assigned a score, and investments are made based on weighted criteria to ensure a balanced risk profile.
It is worth noting that the fund had an exposure of about 0.9 per cent to the distressed IL&FS assets during the 2018 bond crisis, which was later fully recovered.
Equity strategy
The equity allocation complements the debt portion by providing growth potential. HHDF has maintained an equity allocation between 19 and 25 per cent over the past five years, adjusting dynamically to market conditions. The equity strategy focuses on investing in quality businesses at reasonable valuations. Currently, the fund holds overweight positions in the healthcare and financial sectors while remaining underweight in materials.
In terms of market capitalisation, the fund has recently tilted more towards large-cap stocks and reduced exposure to mid- and small-caps. This shift reflects relative valuation dynamics, as large-caps currently appear more attractively priced compared to smaller companies.
Performance
A three-year rolling return analysis over the last seven years shows an average annualised return of 10.7 per cent versus the category average of 8.8 per cent, with returns ranging between 7.6 per cent and 14.2 per cent. As of August 31, 2025, the fund’s debt portfolio carried a yield to maturity (YTM) of 7.3 per cent, slightly higher than the category average of 7 per cent.
The regular plan has an expense ratio of 1.74 per cent, marginally below the category average of 1.77 per cent, while the direct plan’s expense ratio is 1.16 per cent, higher than the category average of 0.92 per cent. The relatively high expense ratios remain a weak point for this category, given their large debt exposure.
The fund also 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.
Published on October 11, 2025
