Hybrid funds see inflows of Rs 1.45 trillion: why have they become so popular?

Hybrid funds witnessed a significant turnaround in FY 2023-24, attracting net inflows of Rs 1.45 trillion, compared to net outflows of Rs 18,813 crore in FY23. The number of investors also increased by 1.4 million, reaching 13.5 million folios by March 2024. The change in tax on debt funds, combined with the desire for diversification and risk management, fueled investor interest in these balanced investment products.

The revival has been driven by significant inflows into the arbitrage category, following withdrawals in the previous financial year.

The increase in assets was complemented by an increase in the number of investors, with the number of folios reaching 13.5 million in March 2024, up from 12.1 million a year earlier, adding an investor base of 1.4 million. This shows the inclination of investors towards hybrid funds.

What are hybrid funds?

These are investment vehicles that combine investments in equity (shares) and debt (bonds) with other assets such as gold, in some cases.

They offer a balance between potential growth from equities and stability from debt, making them suitable for investors with a moderate risk tolerance.

Hybrid mutual funds are a broad category that includes seven types of mutual fund categories. The latest data from the Association of Mutual Funds in India (Amfi) shows that there are a total of 149 hybrid mutual funds, the most popular of which are dynamic asset allocation (31), arbitrage funds (27) and the combined category of balanced and aggressive are funds. hybrid funds (31).

How did they stage a comeback?

Change in tax on debt funds: A key driver was the change in tax rules for debt funds that was 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 turned to hybrid funds as an alternative.

Anticipation of interest rate change: Investors may have expected a fall in interest rates in FY24, which would have prompted them to invest in hybrid funds to take advantage of potentially higher bond yields. Although interest rate cuts were not forthcoming, bond yields remained high, which continued to increase investor interest.

Diversification: Hybrid funds provide diversification across asset classes, which can help limit risk in volatile market conditions. This strategy could have been attractive to investors looking for 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. A single (type) fund can meet almost all investor needs. Once your tax saving needs are met, it is best to choose a suitable sub-fund. -type of the hybrid fund after buying our cover story, then select a set of actual funds within that sub-type, then start a systematic investment plan (SIP) and then stick with it for a long time,” says Dhirendra Kumar , CEO of Value Research.

By understanding the unique value of hybrid funds, the principles of asset allocation and the rebalancing they provide, investors can streamline their portfolios.

“By selecting a suitable hybrid fund, setting up an SIP and committing to it for the long term, investors can reduce the risks of unnecessary complexity and focus on building a resilient and growth-oriented portfolio,” adds Kumar.

Investment breakdown

A significant portion of the inflows (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 benefit (Rs 10,765 crore) and equity savings funds (Rs 10,327 crore).

“At a macro level, assets under management (AUM) of hybrid funds have grown by an impressive 28.90 percent over the past four years, with all eight categories of hybrid/solution funds showing a positive compound annual growth rate (CAGR). The AUM of hybrid funds as of March 2024 is 2.76 times the AUM as of March 2020,” brokerage IIFL said in a note. It said the best growth came from multi-asset allocation funds and balanced arbitrage funds.

“While both categories received a boost from new fund offerings (NFOs), they also benefited as investors turned to asset allocation funds to achieve better diversification across asset classes. Arbitrage funds have historically grown at an impressive four-year CAGR of 30.84 percent, but that is more due to high net worth (HNI) sovereign money moving from liquid funds to arbitrage funds. In addition to the favorable tax treatment, the returns of arbitrage funds also benefited from the volatility of the market,” said IIFL.

Interestingly, the laggards were traditional hybrid funds, such as conservative allocation funds and balanced allocation funds (BAF).

“Investors are looking at active asset allocation from fund managers, which is why categories such as BAFs, multi-asset allocation funds and equity savings have made good progress. Investors are happy when fund managers can provide an increase in returns while reducing their overall risk. Hybrid funds have emerged as a smart alternative from an asset allocation perspective. Alongside equities and debt, allocation funds have emerged as a strong class of alternative funds,” the brokerage said.

Impact on the industry:

The massive inflows from hybrid funds pushed the category’s assets under management to Rs 7.2 trillion by March 2024, a significant increase of 51 per cent over FY23.

Overall, the mutual fund industry saw a record high of Rs 53.40 trillion in March 2024, reflecting a positive trend.

First print: April 22, 2024 | 10:30 AM IST