Hybrid mutual fund (MF) offerings, which were expected to drive higher investor interest post the change in debt fund taxation, are set to end 2023 with the slowest account growth in the past three years. Investment accounts in hybrid funds are up 5.7 per cent so far in 2023 compared to 7.6 per cent in 2022 and 20 per cent in 2021, shows data from the Association of Mutual Funds in India (Amfi). In 2020, the count had dipped 2.4 per cent.
While new account opening is showing sluggish growth, the flows have started to pick up in some of the hybrid offerings, especially those meant for institutional investors like arbitrage funds, equity savings scheme, and multi-asset funds, which were touted as the flavour of the season in 2023.
The net inflows into hybrid schemes in 2023 (as of November) stood at Rs 78,200 crore. Arbitrage and equity savings accounted for 68 per cent of the total inflows.
According to mutual fund executives, hybrid funds moved out of investors’ radar in 2023 as they were captivated by a red-hot equity market, especially the mid-cap and small-cap space.
“This year, investors have been more comfortable putting money into equity funds, given the ongoing rally. This is evident in the record folio additions in small-cap funds. They are chasing returns and the market is also rewarding them,” said Niranjan Avasthi, Senior Vice President & Head – Product, Marketing, and Digital at Edelweiss MF.
Small-cap funds have added 5.9 million accounts, also known as folios, in 2023 so far as against 0.7 million additions in hybrid schemes.
Balanced advantage funds (BAFs), which are the second-most popular hybrid offering, registered a one per cent drop in active folios to 4.4 million. BAFs, along with aggressive hybrid funds, account for 77 per cent of the total hybrid folios. Multi-asset funds were the only bright spot as their folio count surged 68 per cent to 1.5 million.
Hybrid funds invest in a mix of equity and debt, with some categories even allowing exposure to commodities and arbitrage strategy. These products, designed for investors who wanted to leave it to fund managers to do their asset allocation, gained a shot in the arm with the upward revision of debt fund taxation in March. This made investing in hybrid funds more tax-efficient than investing separately in equity and debt funds. Most hybrid funds qualify for equity taxation.
In anticipation of higher flows, MFs rushed to launch hybrid funds in 2023. Fund houses have launched 11 schemes this year compared to 5 in 2022 and 6 in 2021. The launches were largely in multi-asset and BAF categories, with some fund houses coming out with balanced hybrid funds, a little-known category with no schemes until 2022.
Some of the fund managers have also been recommending hybrid funds to investors in the present context, where equity valuations are above longer-term averages and at the same time bonds are attractive.
Investment advisors also concur with the view. “We continue to believe that BAFs are a good option right now. The automated rebalancing model between equity and debt helps with behavioural biases that could exist due to recent outperformance of one asset class. Also, they are more tax-efficient than pure debt,” said Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors.
First Published: Dec 28 2023 | 6:38 PM IST