Investors are looking beyond pure-play equity schemes, say analysts

The fear of a sharp correction in the equity market is compelling MF investors to consider less risky alternatives, say industry players

Hybrid and passive investment schemes offered by mutual funds (MFs) are increasingly being preferred by investors to pure-play equity schemes. Fear that the equity market may come off after a sharp run-up is compelling investors to book non-equity or less risky alternatives, say industry players.

A slew of new fund offers (NFOs) in passive funds and international funds have also led to investors looking to diversify from equity schemes. The data from the Association of Mutual Funds in India (Amfi) shows that in the past six months, hybrid funds have seen net inflows of around Rs 22,000 crore. Hybrid funds include dynamic asset allocation funds, multi-asset allocation funds, and arbitrage funds.

“The advantage of hybrid funds is that the portfolio changes according to the market conditions and are tax effective. Investors who are not willing to enter the markets at current levels are preferring hybrid funds and asset allocation funds,” said Jimmy Patel, MD and CEO, Quantum AMC.

Hybrid invests in a mix of equity and debt products, depending on the market environment. When valuations of the equity market are high, they increase allocation to debt and vice-versa. Despite having an allocation to debt, categories like aggressive hybrid and balanced hybrid have given returns of 45 per cent and 30 per cent, respectively, in the past year.

Edelweiss MF in its note on Edelweiss Equity Saving Fund — which invests in equity, debt, and arbitrage — states that the second Covid wave will result in an extended accommodative stance of the central bank, along with the recent Budget which has already laid down a path for a stable recovery. As a result, equities will remain a preferred asset class amid higher volatility.

“Small bouts of correction are expected followed by earnings upgrades in sectors that will drive the market upwards. Therefore, a low-risk investor can invest in the equity savings fund to benefit from a market recovery with much lower volatility and drawdown,” said the note.

On the other hand, equity funds witnessed net outflows of Rs 1,300 crore in December-May as investors continued to book profits with the markets touching new highs. In the past year, the Sensex has given returns of around 52 per cent.

Not only hybrid schemes but also other schemes, such as index funds, exchange-traded funds and funds of funds investing overseas, have seen net inflows of around Rs 42,680 crore in the past six months.

Fund houses had also lined up new fund offerings (NFOs) in passive and international funds which also helped such schemes to increase their assets. Net assets under management of other schemes stood at Rs 3.55 trillion as of May, compared to Rs 2.94 trillion in December 2020.

“In the past few months, we have seen investors looking to invest into passive products. Cost of index funds or ETFs are low compared to active funds and investors have been attracted to the category,” said Patel.

Investors are also increasingly choosing passive funds over active funds in the large-cap category as several of active funds have underperformed the equity markets.

While gold prices have come under pressure in recent weeks, investment experts say it can be a good asset class from a medium- to long-term perspective.

International gold prices fell 7 per cent in June and analysts say the precious metal faced headwinds in the form of a revival in the economy, possible interest rate hikes, and gaining popularity of cryptocurrencies. However, uncertainty around growth, inflation or any other black swan event mean gold is one asset class investors can’t write off entirely, say experts.