Hybrid Funds Gather Steam as Investors Swarm In

Hybrid funds are getting traction from investors with such instruments witnessing a net inflow of Rs 27,220 crore in three months ended June, more than double from the preceding quarter. Hybrid funds are mutual fund schemes that typically invest in a combination of equity and debt securities and sometimes to other asset categories such as gold.

Nikhil Kamath, Co-founder and CIO, True Beacon and Zerodha, said equity market valuations seem to be frothy currently, and this is compelling market participants to consider more generalized products as compared to equity-focused ones.

"Major central banks across the globe are taking interest rate hikes and that is going to spill over to India. This, in turn, makes debt a favourable asset class once again after the low interest-rate environment," he added.

Harshad Chetanwala, Co-founder- MyWealthGrowth.com, said investors are evaluating hybrid funds as markets have been near an all-time high and some investors would like to reduce the risk and at the same time participate in equity markets.

According to data by the Association of Mutual Funds in India (Amfi), hybrid funds witnessed net inflow to the tune of Rs 27,220 crore in the quarter ended June 2021, much higher than Rs 13,055 crore in the three months ended March. However, such funds had seen a net withdrawal of Rs 12,862 crore in three months ended December 2020.

To investors, hybrid funds help capitalise from the investment opportunities in the equity markets, provide stability of the debt markets, and strategic diversification of gold, which could sustain the portfolio when other two asset classes struggle, Himanshu Srivastava, Associate Director Manager Research, Morningstar India, said.

"The importance of asset allocation cannot be overstated, and over the years, investors have increasingly started to comprehend that. A hybrid fund just offers the same in a ready format. With equity, debt as well as gold performing well in recent times, these funds have expectedly attracted investor interest," he added.

Of Rs 27,220 crore inflow seen in hybrid funds, a staggering Rs 20,825 crore came into arbitrage funds and Rs 5,120 crore into balanced advantage funds. Arun Kumar, Head of Research at FundsIndia, said balanced advantage funds are a mid-path solution that most investors are using to take reasonable equity exposure with the inbuilt mechanism to automatically increase equity allocation if the market corrects. This is why the category is getting good inflows in recent months.

On the other hand, arbitrage funds are usually used as an alternative to liquid funds and they have similar returns over a 6-month cycle but with a slightly higher volatility profile. The key advantage is that they enjoy equity taxation which makes it attractive as a short-term alternative to liquid funds, he said.

However, unlike liquid funds, arbitrage fund returns are not smooth and are influenced by several factors including interest rates, equity market direction, volatility, and FPIs (foreign portfolio investors) participation. Over the last few months, arbitrage funds have done well relative to liquid funds as the market participants were bullish and volatility was also high. This has led to higher inflows into the category, Kumar noted.

Broadly, there are six categories within the hybrid fund segment as per the Sebi classification. All of them offer a rather differentiated investment proposition and have their appeal. According to Morningstar India's Srivastava, hybrids are a prudent investment option for new or first-time investors.

"By investing in hybrid funds, investors get the exposure of different asset classes, which otherwise would be difficult for them to have. While most hybrid fund categories have set or defined asset allocation patterns, they are good options to start with," he added. Going forward, MyWealthGrowth.com's Chetanwala said that hybrid funds may continue to witness inflows in the future as well.

Considering the current market projections where the equity segment is at such high points where the growth has become stagnant and where debt funds are struggling to beat the returns of traditional instruments, investors might stay attracted towards hybrid funds, Priti Rathi Gupta, Founder of LXME, said. It protects their capital against market volatility and competitive returns as there is equity exposure, she added.