Hybrid mutual fund schemes have witnessed a significant rise in popularity among investors, with inflows reaching Rs 20,634 crore in January 2024, marking a 37% increase compared to December 2023. The surge in inflows can be attributed largely to the attractiveness of hybrid funds as an alternative investment option following changes in taxation laws related to debt funds.
In the current financial year (FY) 2024, total inflows into hybrid schemes have reached Rs 1.21 lakh crore from April to January. This is a notable turnaround from the outflows experienced in the same period of the previous financial year. Hybrid funds, as a category, typically invest in a mix of debt and equity securities, and sometimes in other assets like gold.
The category started witnessing regular inflows since April 2023, following changes in taxation laws for debt funds implemented in the same month. Before this change, the segment experienced net withdrawals of Rs 12,372 crore in March 2023. According to data from the Association of Mutual Funds in India (AMFI), hybrid schemes saw an inflow of Rs 20,637 crore in January 2024, higher than the Rs 15,009 crore inflow recorded in December 2023. Out of the total inflow in January 2024, arbitrage funds attracted Rs 10,608 crore, while multi-asset allocation funds received Rs 7,080 crore.
In the last six months, a significant portion (50-70%) of allocations in the hybrid fund category have been directed towards arbitrage funds. Experts attribute the increase in flows to hybrid funds to their appeal as an alternative investment option after changes in tax laws. Currently, arbitrage funds offer attractive investment opportunities with spreads of around 8%, especially on a post-tax basis. Additionally, the multi-asset category, offering easy diversification, has become popular among investors.
The segment added 3.36 lakh hybrid folios in January, bringing the total to 1.31 crore, representing 7.7% of the total folios. Hybrid funds are favored by investors with moderate or low-risk appetite as they provide stability in the fixed-income market while reducing volatility associated with equity markets.
Analysts believe that investors are allocating a portion of their fixed-income exposure to hybrid funds following changes in taxation for debt funds. Under the new rules effective from April 1, 2023, debt mutual funds held for more than three years no longer benefit from indexation benefits, which consider inflation during the holding period to reduce taxes.
The surge in inflows has led to a 40% increase in the Average Assets Under Management (AAUM) of hybrid schemes, reaching Rs 7 lakh crore in January 2024 from Rs 5 lakh crore in April 2023. Dynamic asset allocation or balanced advantage funds constitute the largest assets in hybrid fund schemes, with assets reaching Rs 2.37 lakh crore, followed closely by balanced hybrid or aggressive hybrid categories with assets totaling Rs 1.9 lakh crore
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