Hybrid mutual funds stage comeback; see Rs 1.45 lakh crore inflows driven by arbitrage investments

Hybrid mutual fund schemes have seen a resurgence in 2023-24, garnering Rs 1.45 lakh crore in investments, driven by substantial inflows into the arbitrage category, following withdrawals in the previous fiscal year.

The surge in assets was complemented by an increase in the number of investors, with the number of folios reaching 1.35 crore in March 2024 from 1.21 crore a year earlier, adding an investor base of 14 lakh. This shows investors' inclination for hybrid funds.

Hybrid funds are mutual fund schemes that typically invest in a combination of equity and debt securities and sometimes in other asset categories such as gold.

The category has been attracting regular inflows since the beginning of financial year 2023-24 in April after a change in taxation for debt funds that kicked off in the same month. Before that, the segment saw a net withdrawal of Rs 12,372 crore in March.

Overall, the hybrid category saw net inflows of Rs 1.45 lakh crore in FY24, compared to an outflow of Rs 18,813 crore in FY23, data with the Association of Mutual Funds in India (Amfi) showed.

"Anticipating a reversal in the interest rate hike cycle in FY24, market participants strategically allocated funds to capitalize on higher rates, while continuing a favourable stance towards equities, real estate, and gold. However, the rate cuts never materialized and bond yields continue to be higher, retaining the interest of investors," Gopal Kavalireddi, Vice President - Research at FYERS, said. Mirroring the flow, equity-oriented category attracted Rs 1.84 lakh crore in FY24, marking a 25.4 per cent increase.

Of Rs 1.45 lakh crore, a massive amount of Rs 90,846 crore inflow was seen in the arbitrage category, over Rs 33,000 crore in multi-asset allocation, Rs 10,765 crore in balanced advantage fund and Rs 10,327 crore in equity savings fund, data showed.

"FY24 was a unique year where diversification across asset classes yielded excellent returns. Equities, fixed income, commodities, bonds and real estate -- all rose in unison, attracting substantial inflows into multi asset allocation funds. The year also highlighted the changing risk profile of investors where conservative and balanced funds were relegated to negligible flows as smart investors opted for dynamic asset allocation to counter the ever changing market environment," he added.

This huge flow has pushed the assets under management (AUM) of the category to Rs 7.2 lakh crore as of March 2024 from Rs 4.8 lakh crore in FY23, showing a 51 per cent increase. Overall, the mutual fund industry saw its AUM surging by Rs 14 lakh crore to a record Rs 53.40 lakh crore as of March 2024.

Hybrid funds appeal more to investors with a moderate or low-risk profile. These funds are good investment options as they reduce the volatility associated when participating in equity markets while simultaneously providing stability in the fixed-income market.

Additionally, huge interest was garnered by hybrid schemes following a change in taxation for debt funds. Under the new rules that kicked in from April 1, 2023, debt mutual funds held for more than three years will no longer enjoy indexation benefits.

Indexation takes into account inflation during the holding period of a mutual fund unit and consequently increases the purchase price of the asset and this reduces the tax.