Why hybrid mutual funds are gaining currency?

Hybrid funds are back in the limelight after the debt taxation changes in the Budget. This category has seen net inflows of Rs 72,000 crore. What changed for this category and why are investors making a beeline for these funds? Chintan Haria of ICICI Prudential Mutual Fund has answers.

The hybrid mutual fund category, which invests in a mix of asset classes, such as stocks and bonds, and at times, gold and silver, has seen net inflows of more than Rs 72,000 crore since April. This was in the backdrop of outflows in the previous months.

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There are six categories under hybrid funds: Conservative Hybrid, Balanced Hybrid /Aggressive Hybrid, Dynamic Asset Allocation (DAA)/Balanced Advantage Fund (BAF), Multi Asset Allocation, Arbitrage, and Equity Savings funds.

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So, what changed for hybrid funds after April 1 and which sub-categories are in demand? Moneycontrol talked to Chintan Haria, Principal Investment Strategist at ICICI Prudential Asset Management Company, to get some answers. Haria also shed light on why this category is in demand, which hybrid funds are seeing more traction, and how to select a hybrid fund.

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Here’s a summary of what Haria said.

• In Budget 2013, the indexation benefit was taken away from debt mutual funds. So, this meant that whatever gains you make on fresh investments, whether it is after one year, two years or six months, they will be treated as your income and added to your taxable income and charged at the marginal rate.
• The taxation change has made hybrid funds more attractive because this category allows you to participate in the equity as well as have a certain portion in debt while keeping the equity taxation provisions.
• There are a couple of hybrid funds categories that are more popular than the others. The most popular among investors is the arbitrage fund. These funds have been in India for the last 18-19 years. Here the cash futures arbitrage is done so that there is no open equity risk taken by that fund.
• Since, the fund has 65 percent in gross equity, it gets equity taxation.
  Many investors in the last 10 to 15 years have seen the benefits of participating in hybrid funds such as the dynamic asset allocation/ balance advantage fund category. They allow a good mix of equity and debt with the logic of ‘buy low and sell high without worrying too much about volatility’.
• The taxation change has also impacted investments in gold and silver exchange-traded funds (ETFs), which means that investors investing in gold and silver ETFs also incrementally not get the benefit of indexation. So, the multi asset category where equity, debt, commodities, REITs/INVITS are all added in a single fund is becoming more and more popular.
• If you’re young and have a long runway of investment time, a multi-asset fund would be a good category to start with. In one single instrument, you as a youngster are getting exposure to all the possible avenues of financial investment.
• On the other hand, if someone is probably around retirement age, then probably a balanced advantage fund would be a good option along with some percentage allocated to a multi-asset fund.