What's driving HDFC BAF's blockbuster returns?

In a category typically known for moderate returns, the HDFC Balanced Advantage Fund has emerged as a standout performer, delivering over 70 per cent returns in the last three years and outperforming its benchmark by a sizable margin. Once helmed by veteran fund manager Prashant Jain, the fund is now managed by Gopal Agrawal, Senior Fund Manager – Equity at HDFC Mutual Fund.

According to Agrawal, the HDFC Balanced Advantage Fund’s outperformance stems from building on Jain’s value-oriented approach while combining it with growth strategies and strategic sectoral shifts.

In this interview, Agrawal, who oversees four schemes at HDFC Mutual Fund with a combined asset base of Rs 1.54 lakh crore, shares insights into his investing style, how he navigates premium valuations and growth, the factors behind the HDFC Large and Mid Cap Fund’s strong showing and his rationale for maintaining a wide investment universe across his funds.

To begin this conversation, the Indian equity market has experienced a sharp rally over the past year. Are we now entering expensive territory? What are the risks on your radar?

The current market has rallied in line with policy decisions taken by the RBI (Reserve Bank of India) to cut the repo rate, inject liquidity and reduce the CRR (cash reserve ratio) rate. As a result, bond yields have come down from 7.35 per cent to 6.3 per cent. In a way, the Indian equity market has been reset at a higher level as the discounting rate has decreased. Going forward, I sense that after this rally, the Indian equity market is trading at about a 14 per cent premium to its long-term average, which is slightly on the higher side, but not at the euphoric levels we saw in September 2024. So yes, we are entering a slightly expensive zone, but if earnings are strong, I would say it is expensive but not at an extreme or euphoric level.

Despite the broad surge in the markets, are there still segments that offer value in today's market?

Even after this rally, I still feel that large banks and insurance companies look relatively attractive. From a medium-term perspective, I believe there is still value left in the pharma and auto sectors in the future.

Moving on to your investment style and philosophy, do you approach stock picking from a bottom-up perspective, or do you start with a macro view?

Generally, I follow a bottom-up approach for stock picking. However, I also keep an eye on global developments, as they offer some insight into how things might perform in the future. I'm a strong proponent of the free cash flow to yield method because I believe cash is king. Companies that generate higher free cash flow and commensurate high ROE should command decent valuations in the market. So, the free cash flow yield method is something I follow significantly. In some cases, I also look at replacement cost and relative valuation. These are the three parameters I widely use when picking stocks and constructing a portfolio.

Given historical trends, companies with higher free cash flow often come at a premium. So, how do you balance high valuations and growth when choosing stocks?

What has happened over time is that the nominal GDP growth rate of India has moderated from 14 per cent to closer to 10 per cent. In this scenario, any company that delivers consistent double-digit top-line and bottom-line growth can continue to command a significant premium compared to its historical valuation and that of its peers. When a company trades at a higher multiple, I believe it should deliver at least double-digit growth, exceeding the nominal GDP growth rate, and an ROE in the mid-to-high teens.

Regarding one of your funds, the HDFC Large and Mid Cap Fund has performed quite well. It's one of the most diversified funds in its category, with over 200 stocks. We want to understand two things: Is this your typical style across mandates? How do you manage and track such a large universe of stocks?

Generally, my approach to portfolio construction is to deliver absolute positive returns to investors. Though as a mutual fund manager, I'm benchmarked to an index, many businesses go through economic cycles. I believe that when an investor chooses a mutual fund, I should try to protect their downside and deliver consistent absolute returns over time. That's my goal. So I try to buy stocks where I see absolute value and where the business can sustain across cycles. That's why I constantly look for opportunities in the market.

Regarding stock selection and tracking a large portfolio, I've been in the market since 2002. In the early part of my career, I worked as an analyst covering many sectors. At HDFC, we have one of the best research teams in the country, comprising 11 highly qualified and experienced analysts. Our fund house covers over 480 stocks. This helps me maintain strong coverage and continuously identify new ideas.

To elaborate, will you continue to hold a large number of stocks going forward, or will this decision depend on market conditions?

Clearly, I aim to reduce the number of stocks in the portfolio over time. But the number of stocks has never been a constraint for me. I don't focus on that while managing funds. I believe that if a stock has value and represents a good business, I would continue to own it. I never chase momentum, and I only trim or exit one when necessary. So, I don't view the number of holdings as a constraint. What's important is to deliver a good experience and strong returns to investors over time.

Talking about the HDFC Large and Mid Cap Fund, it has continued to do well. What's working for the fund? Did any specific sector or style calls help?

The Large and Mid Cap Fund benefited from early exposure to the industrial sector. After Covid, I saw a lot of value in that segment and took a significant position in industrials and automobiles, which helped in the initial phase. Later, I invested some of that money in consumer-centric businesses that were undervalued. That also worked well. I take macro calls on how things might behave, and sectoral rotation along those lines has helped the fund generate consistent returns.

During my five-year journey, the one regret I have is my decision to invest in microfinance institutions, which didn't play out well, resulting in a moderation of fund performance between September 2024 and March 2025. Other than that, I've tried to justify investors' trust in the fund.

As you rightly pointed out, exposure to NBFCs hasn't worked well for the fund, especially HDFC Multi Cap, in the past year. What course corrections have you made to improve the fund's performance going forward?

I'm very focused on maintaining and improving performance. When the market corrected by the end of March or early April, I shifted a significant portion of the portfolio into consumer-centric businesses, particularly those in the consumer discretionary sector. I also added some mid-cap and small-cap IT stocks, as well as pharma and cement. We've seen a decent rally in cement, small-cap IT and pharma, especially in CDMO and weight-loss drug-related opportunities, which helped improve performance significantly.

I'd also like to mention that some of the RBI's recent policy actions, apart from liquidity and rate cuts, have improved the outlook for NBFCs (non-banking financial institutions) and MFIs (micro finance institutions). That's also helping the fund recover. From April to date, you can see a noticeable improvement in fund performance.

Moving on to the Balanced Advantage Fund, which has a long legacy, including 24 years under Prashant Jain. How did you balance maintaining continuity while bringing in your strategy?

First of all, it is indeed an honour for me, as a fund manager, to manage a fund that was previously managed by the legendary fund manager, Prashant Jain. Frankly, it's very tough for a small guy like me to fill his shoes. I'm just trying my best because the standard he set is very high. I've said earlier that I am also a votary of the free cash flow yield and replacement cost methods. This gives me a value bias in the portfolio, so we've tried to maintain that legacy in the fund.

Although I also have a growth bias, the combination of value and growth has driven this fund since I took over. Over the last almost three years, since Prashant Jain left the fund house and I began managing the fund, we've delivered returns of around 75.9 per cent to investors, outperforming the benchmark return of 39.65 per cent. That's an outperformance of 36.2 per cent, which is very satisfying. I'll continue to strive to do justice to the fund.

The fund has a long history of strong performance, but in the past year, it underperformed slightly. However, in 2025, it has been outperforming again. What drove this turnaround?

Our fund has consistently outperformed the benchmark. Initially, we benefited from the rally in industrials, defence and power. Later, I shifted some of that capital into consumer-centric businesses, pharmaceuticals and select IT stocks that were undervalued. Specifically, we increased exposure to consumer discretionary, private banks and insurance, which had lower weights earlier.

This rotation worked very well. For instance, in FY24, we generated an alpha of 20.71 per cent, which is very high. Even in FY25, when the rally changed, we still generated close to 8 per cent alpha. Usually, when you generate such high alpha in one year, you tend to underperform the following year; however, our timely changes helped maintain our outperformance. Year-to-date, we've continued to generate alpha. So, dynamic asset allocation and sector selection have both played key roles.

Balanced advantage funds shift dynamically between equity and debt, which isn't always visible to investors. How should they think about the role of this fund in their portfolios?

This fund is designed for moderate risk, so the return expectation should also be mild. It blends equity, arbitrage and fixed income. It's ideal for moderate risk-takers, especially retirees and pensioners.

Its benchmark is a 50-50 split between the Nifty 50 and Nifty Composite Debt Index. That mix gives stability from bonds and moderate exposure to equities. The fund manager aims to generate alpha over time, and you've seen that with this fund.

What's unique here is flexibility. For instance, arbitrage positions help maintain equity compliance (65 per cent), but when markets correct, we can shift that arbitrage money into net long equity. This flexibility gives the fund considerable firepower in both bullish and bearish markets.

Many of your funds have a high number of stocks but are still top-heavy. For example, the top 50 stocks make up over 50 per cent of the portfolio. What's the thinking behind this structure? High stock count with a concentrated core? Is it risk control, return enhancement or both?

I aim to provide investors with a positive experience. Mid- and small-cap stocks tend to be volatile and have lower liquidity, especially small caps. When cycles turn or external events occur, exiting those positions can be challenging due to the fund's size.

That's why I prefer a portfolio with a large number of stocks and lower individual weights; it reduces risk. My goal is to generate absolute positive returns, and I personally want to protect downside and deliver consistent performance.

This approach, of having a concentrated top and diversified tail, is unique to me, and I believe it works particularly well in the volatile mid- and small-cap space.

Also read: What's behind DSP Large Cap Fund's strong run?