Hybrid mutual funds: Hybrid mutual funds have made a comeback in the fiscal year 2023-24, witnessing an influx of Rs 1.45 lakh crore in investments, primarily fuelled by substantial inflows into the arbitrage category, according to AMFI data. This resurgence marks a turnaround from the previous fiscal year's withdrawals.

The surge in assets has been accompanied by a notable expansion in the investor base, evidenced by the increase in the number of folios, which reached 1.35 crore in March 2024, up from 1.21 crore a year earlier, representing an addition of 14 lakh investors. This trend highlights investors' growing preference for hybrid funds.

Taxation twist sparks hybrid fund surge

Hybrid funds, which typically invest in a mix of equity and debt securities, as well as other asset categories like gold, have been attracting consistent inflows since the onset of the financial year 2023-24, following a change in taxation for debt funds introduced in April of the same year. Prior to this, the segment experienced a net withdrawal of Rs 12,372 crore in March.

Overall, the hybrid category witnessed net inflows of Rs 1.45 lakh crore in FY24, a stark contrast to the outflow of Rs 18,813 crore in FY23, as reported by the Association of Mutual Funds in India (Amfi).

Gopal Kavalireddi, Vice President - Research at FYERS, attributed this trend to market participants' anticipation of a reversal in the interest rate hike cycle in FY24, prompting strategic allocation of funds to capitalise on higher rates, while maintaining a favourable stance towards equities, real estate, and gold. However, the anticipated rate cuts did not materialise, and bond yields remained elevated, retaining investor interest.

Arbitrage leads the charge

Of the total inflows of Rs 1.45 lakh crore, a notable portion amounting to Rs 90,846 crore flowed into the arbitrage category, with over Rs 33,000 crore in multi-asset allocation, Rs 10,765 crore in balanced advantage funds, and Rs 10,327 crore in equity savings funds.

FY24 witnessed a unique scenario where diversification across asset classes yielded good returns, with equities, fixed income, commodities, bonds, and real estate all experiencing simultaneous growth, attracting substantial inflows into multi-asset allocation funds. This shift in investor behaviour highlights the changing risk profile, as conservative and balanced funds saw negligible flows while investors opted for dynamic asset allocation to navigate the evolving market dynamics.

The substantial inflow has propelled the assets under management (AUM) of the hybrid category to Rs 7.2 lakh crore as of March 2024, up from Rs 4.8 lakh crore in FY23, marking a 51 per cent increase. Overall, the mutual fund industry witnessed its AUM soar by Rs 14 lakh crore to a record Rs 53.40 lakh crore as of March 2024.

Sweet spot for risk- averse investors

Hybrid funds hold particular appeal for investors with moderate or low-risk profiles, offering a balanced approach by reducing volatility associated with equity markets while providing stability in the fixed-income market.

Furthermore, the interest in hybrid schemes was boosted by changes in taxation for debt funds, particularly with the elimination of indexation benefits for debt mutual funds held for more than three years under the new rules effective from April 1, 2023.

(With PTI Inputs)