Hybrid Funds

In terms of mutual funds popularity, the alternative space has been attracting a lot of interest in the last 3 years post the pandemic. What we now see is a gradual shift towards the hybrid funds.

What exactly are hybrid funds

Unlike equity and debt funds which lean towards one of the asset classes, hybrid funds are a mix. The most basic form of hybrid funds are the aggressive funds and the conservative funds. But the big flows are not going there. In the last 2 years, big money has flowed into the dynamic allocation funds (BAFs), Multi-Asset allocation funds and arbitrage funds. Of course, arbitrage funds are like liquid funds, but their unique mix of equities and derivatives have made the arbitrage funds highly sought after.

Why are arbitrage funds special 

Let us first look at the arbitrage funds. These fund have a long position in the equity stocks and a short position in the equivalent futures. Hence the returns are locked and they normally tend to be similar to the short-term money market rates. However, in the last few months, the arbitrage funds have yielded higher returns on account of the higher level of volatility in the equity markets. Also, the tax benefits of an equity fund are also applied to the arbitrage funds, which also makes these arbitrage funds tax efficient. It is this elegant amalgam that makes arbitrage funds an exciting story.

Why allocation funds

If you look at the NFO data for the past couple of years, then most of the NFO flows into hybrid funds have been into these dynamic allocation funds and also the multi-asset allocation funds. Both have some common advantages. Both these funds offer a mix of assets with discretion given to the fund manager. However, both are largely rule based funds too, in the sense that any changes in allocation is based on some clear sets of rules and a framework. This makes it a lot more predictable for the investor. While BAFs were extremely popular in 2021 and 2022, in recent months it is the essentially diversified multi-asset allocation funds that are seeing a lot of interest from investors.

Hybrid is a smart alternative

For a long time, Indian investors had the discrete choice between debt and equity. In last 4 years, these investors had a wider choice between active debt, active equity, passive debt, and passive equity. Now, the new kid on the block is the hybrid funds. They are not just about combining debt and equity. They are about offering the fund managers a higher level of allocation freedom in a systematic and rule-based manner. It is then, that these hybrid funds double up as allocation funds for investors. In the past, empirical studies had proved that returns are about asset allocation. The hybrid funds offer you the gateway!