 "mutual funds")
Hybrid funds saw a significant turnaround in 2023-24 financial year, attracting a net inflow of Rs 1.45 trillion compared to a net outflow of Rs 18,813 crore in FY23. The number of investors also increased by 1.4 million, reaching 13.5 million folios in March 2024. The change in debt fund taxation, combined with the desire for diversification and risk management, fuelled investor interest in these balanced investment products.
The resurgence has been driven by substantial inflows into the arbitrage category, following withdrawals in the previous financial year.
The surge in assets was complemented by an increase in the number of investors, with the number of folios reaching 13.5 million in March 2024 from 12.1 million a year earlier, adding an investor base of 1.4 million. This shows investors' inclination for hybrid funds.
What are Hyrbid Funds?
These are investment vehicles that combine investments in equity (stocks) and debt (bonds) along with other assets like gold in some cases.
They offer a balance between potential growth from equities and stability from debt, making them suitable for investors with moderate risk tolerance.
Hybrid mutual fund is a broad category that entails seven types of mutual fund categories. The latest Association of Mutual Funds in India (Amfi) data shows there are a total of 149 hybrid mutual fund schemes, of which the most popular ones are dynamic asset allocation (31), arbitrage funds (27) and combined category of balanced & aggressive hybrid funds (31).
How have they staged a comeback?
Change in debt fund taxation: A key driver was the change in tax rules for debt funds implemented in April 2023. This change eliminated the indexation benefit for debt funds held for more than three years, making them less attractive. Investors may have shifted to hybrid funds as an alternative.
Anticipation of interest rate reversal: Investors may have expected a decline in interest rates in FY24, leading them to invest in hybrid funds to capitalise on potentially higher bond yields. Although rate cuts didn't materialise, bond yields remained high, continuing to attract investor interest.
Diversification: Hybrid funds offer diversification across asset classes, which can help mitigate risk in volatile market conditions. This strategy might have appealed to investors seeking a balance between growth and stability.
Should you invest in a hybrid fund?
"Hybrid funds are the perfect antidote to investing in too many funds. One single (type of) fund can serve practically all investor needs. Once your tax-saving needs are taken care of, the best thing to do is to choose a suitable sub-type of the hybrid fund after imbibing our cover story, then select a set of actual funds within that sub-type, then start a systematic investment plan (SIP) and then stick to it for a long time to come," says Dhirendra Kumar, chief executive of Value Research.
By understanding the unique value of hybrid funds, the principles of asset allocation and the rebalancing they offer, investors can streamline their portfolios.
"By selecting a well-suited hybrid fund, setting up an SIP and committing to it over the long haul, investors can mitigate the risks of unnecessary complexity and focus on building a resilient and growth-oriented portfolio," adds Kumar.
Breakdown of investments
A significant portion of the inflow (Rs 90,846 crore) went into the arbitrage category, which focuses on short-term profit opportunities through arbitrage strategies.
Other notable inflows were seen in multi-asset allocation (Rs 33,000 crore), balanced advantage (Rs 10,765 crore), and equity savings funds (Rs 10,327 crore).
"At a macro level, the assets under management (AUM) of hybrid funds have grown at an impressive 28.90 per cent over the past four years, with all the eight categories of hybrid/solution funds showing positive compund annual frowth rate (CAGR). The AUM of hybrid funds as of March 2024 is 2.76 times the AUM as of March 2020," said brokerage IIFL in a note. It said the best growth came from multi-asst allocation funds and balanced arbitrage funds.
"While both these categories got a boost from new fund offers (NFOs), they also gained from investors gravitating towards asset allocation funds to get a better pan-asset class diversification. Arbitrage funds have expanded at an impressive 30.84 per cent CAGR in the past four years, but that is more due to high-networth (HNI) treasury money gravitating from liquid funds to arbitrage funds. After all, apart from the favourable tax treatment, arbitrage fund returns also gained from market volatility," added IIFL.
Interestingly, the laggards were the traditional hybrid funds like the conservative allocation funds and the balanced allocation funds (BAF).
"Investors are looking at active asset allocation from fund managers, which his why the categories like BAFs, multi asset allocation funds and equity savings have seen good traction. Investors are happy if fund managers can give a return booster while also reducing their overall risk. Hybrid funds emerged as a smart alternative from an asset allocation perspective. Apart from equity and debt, allocation funds have emerged as a strong class of alternative funds," noted the brokerage.
Impact on industry:
The massive inflow in hybrid funds pushed the category's AUM to Rs 7.2 trillion in March 2024, a significant increase of 51 per cent from FY23.
Overall, the mutual fund industry saw its AUM reach a record high of Rs 53.40 trillion in March 2024, reflecting a positive trend.
