Hybrid Funds – A trend that looks like it is here to stay - Leading Investment Partner In India

Increase In Allocation Over The Past Year

• Hybrid category has witnessed decent inflows over the last 4 months

• Over the past year, net AUM of hybrids has seen a huge jump of 74% to Rs 8.72 lakh crore.

• Major drivers of this huge surge in Hybrids are the investors’ appetite for stable risk adjusted returns amid near term uncertainty.

• Hybrid funds provide blended attributes of multiple asset classes such as Equity, Debt & other asset classes such as Gold/Silver/REITs/ Global Equity.

• They provide potential for growth via Equity exposure, protect downside via debt exposures and hedge against uncertainty via exposures in bullion such as Gold/Silver.

Arbitrage & Multi Asset Allocation funds are major contributors to the spike in the Hybrid Funds category

Impact Of Changes In Taxation

Hybrid Funds enjoy a distinct tax advantage over Debt instruments and hence on post tax basis, returns of Hybrid funds is superior
and hence more appealing to investors.

• Earlier LTCG 20% rate with indexation benefit was available

• Now it is standard slab rate taxation for Debt instruments

Some Events And Developments Influencing The Markets

• A combination of global & domestic risk elements has contributed to near term uncertainty and these factors are likely to weigh down upon the market in the near term. In the US, S&P 500 is at all time high with the US Dollar Index has strengthened further and trading close to all-time highs.

• Domestic equities are close to all-time highs. Domestic 10 Year Gsec has hovered around 6.7-6.8% range amid speculations around RBI’s QE cycle start. Gold has rallied by ~25% on YTD basis and trading close to all-time highs. Macro-economic indicators on Domestic front have softened and Q2FY25 Corporate earnings show more downgrades than upgrades.

• Regime change in US with Donald Trump in the President’s office in Jan’25 would have a huge bearing on global landscape, with uncertainty around policy measures, taxation changes, trade tariffs. Geopolitical tensions continue to simmer in the Middle East & Ukraine which is weighing on commodities driving volatility in crude oil prices. Economic growth in China has shown signs of sluggishness, manufacturing activity has been stagnant & People’s Bank of China (PBoC) stimulus measures are implemented to arrest the further downtrend along with a host of other initiatives to revive growth.

• Given these risk elements coupled with potentially stable risk adjusted returns offered by Hybrid MFs, it makes them particularly appealing compared to plain vanilla long only equity products as we head into 2025.

Hybrid Funds Better Equipped To Handle Dips & Rallies

• Hybrid category of MFs such as Balanced Advantage Funds(BAF), Dynamic Asset Allocation(DAA) and Multi Asset Allocation (MAA) funds are a decent option as they by design help tide thru market phases based on market valuation based tweaks in major asset classes such as Equity, Debt, Gold/Silver, REITs/InVITs and Global Equity.

• In a rising market when equity valuations look stretched, BAF/DAA funds crop equity exposures and increase in debt which tends to provide cushion during market drawdowns. Similarly, exposures in equity are increased during market corrections which benefits the fund returns when equities rebound. Hence, a market valuation linked instrument such as BAF/DAA/MAA helps investors navigate through tough phases in the markets.

• On a historical basis, a Hybrid fund category such as Balanced Advantage funds (BAFs) have dropped much lesser than benchmark such as NIFTY 50.

Performance of Flexicap funds vs Hybrid funds during extreme market drawdowns (greater than 5% drop in Indian Equities)

Note: Last 10 years of data is considered for analysis (from 2014 to 2024 YTD). C Category Average returns in each category considered

Performance of Flexicap funds vs Hybrid funds during extreme rallies (greater than 5% rise in Indian Equities)

Note: Last 10 years of data is considered for analysis (from 2014 to 2024 YTD). Category Average returns in each category considered

Suitable Risk Profiles

From a Conservative investor looking for stability to an aggressive investor aiming for growth, hybrid funds cater to various risk profiles.

• Conservative Hybrid funds take 75-90% exposure in debt instruments, rest in Equity & equity-oriented instruments, suited for more conservative client. Arbitrage funds, Equity Savings Funds are some of the conservative hybrid funds.

• Aggressive Hybrid take 65-80% exposure in Equity instruments, rest in Debt oriented instruments suit investors with aggressive risk profile. Balanced Advantage Funds and Multi Asset Allocation fund are some of the aggressive hybrid funds.

Better Than Fixed Deposits?

The choice between a hybrid MF and Fixed Deposit is completely linked to investor’s risk appetite and time horizon. Hybrid MFs are suitable for investors seeking a balance of growth and stability in one’s portfolio while Fixed Deposits are ideally suited for investors seeking guaranteed returns and principal safety. Hybrid Funds enjoy a distinct tax advantage over Fixed Deposits and hence on post tax basis, returns of Hybrid funds is superior and hence more appealing to investors from long term investment perspective.