Mutual Funds: Hybrid Funds Emerge as Preferred Choice for Investors in January 2024

Hybrid mutual fund schemes have emerged as favourite among investors, attracting Rs 20,634 crore in January 2024. This marks a 37% spike as compared to December 2023.

The uptick has been registered largely due to the appeal of hybrid funds as an alternative investment option after a change in taxation laws related to debt funds.

At present, the total inflow in the category stands at Rs 1.21 lakh crore in the April-January period of the current financial year (FY) 2024. However, hybrid schemes witnessed outflow in the same duration of the preceding financial year.

Typically, hybrid funds are a mutual fund category that invests in a combination of debt and equity securities and, at times, in other asset categories such as gold.

This mutual fund category has been drawing regular inflows since April 2023, after a change in taxation for debt funds that came into effect in the same month. Before that, the segment witnessed a net withdrawal of Rs 12,372 crore in March 2023.

As per the data from the Association of Mutual Funds in India (AMFI), hybrid schemes experienced an inflow of Rs 20,637 crore in January 2024, which was higher compared to the Rs 15,009 crore inflow witnessed in December 2023.

Out of the Rs 20,637 crore inflow in hybrid funds in January 2024, arbitrage funds saw an inflow of Rs 10,608 crore, while in the case of multi-asset allocation funds, it stood at Rs 7,080 crore.

In the past six months, about 50-70% of the allocation in the hybrid fund category has been directed towards arbitrage funds.

Experts state that the prime reason for the increase in flows in this category is that they are being looked at as an alternative after a change in tax laws. At present, arbitrage funds are sitting at a spread of about 8%, thus making it an attractive investment opportunity, especially on a post-tax basis.

In addition, the multi-asset category, offering easy diversification, has become the choice for investors. When it comes to folios, the segment added 3.36 lakh hybrid folios in the month under review, taking the total to 1.31 crore, representing a share of 7.7% on the total folios of 16.95 crore.

Hybrid funds are the preferred choice for investors who generally have a moderate or low-risk appetite. These funds are ideal investment tools as they reduce the volatility associated when participating in equity markets while at the same time providing stability in the fixed-income market.

Analysts hold the view that investors are opting to invest a portion of their fixed-income exposure via hybrid funds after the change in taxation for debt funds.

As per the new rules that became effective from April 1, 2023, debt mutual funds held for more than three years will not gain from indexation benefits. Typically, indexation takes into account inflation during the mutual fund unit holding period and consequently increases the purchase price of the asset, which results in a reduction of the tax.

As a result of this inflow, the Average Assets Under Management (AAUM) of hybrid schemes has moved up by 40% to Rs 7 lakh crore in January-end from Rs 5 lakh crore in April 2023.

In the hybrid fund schemes, the largest assets are related to the dynamic asset allocation or balanced advantage category, with assets touching Rs 2.37 lakh crore. The balanced hybrid fund or aggressive hybrid category closely follows, with assets tipping at Rs 1.9 lakh crore.