Mutual funds investors shift to hybrid categories as stocks hit record high

In a cautious move, mutual fund investors have started shifting their investments from pure equity funds to “aggressive hybrid” funds that include both equity and debt in recent weeks as leading Indian equity indices are experiencing record highs. In view of the concerns related to pricey valuations, experts have underlined that hybrid funds can provide support to the downside if the market returns to normal.

According to the Association of Mutual Funds of India (AMFI), hybrid funds saw net inflows of Rs 741 crore in July 2021. As per a Business Standard report, this category of funds has provided average returns of 41 percent in the past one year. This is significantly higher returns than any hybrid categories including conservative hybrid, dynamic asset allocation and multi-asset allocation.

Since 2017, hybrid category of funds was preferred by investors as it was less risky than pure equity funds. Furthermore, it provided greater returns than debt schemes. However, as equity returns starting booming, hybrid funds became obsolete in the market.

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Industry experts have pointed out elevated levels of markets have facilitated a large number of investors in shifting from pure equity schemes to hybrid categories.

“Aggressive hybrid funds remove the timing element and given the higher exposure of around 70 percent, historically have ended up with higher returns over the BAF (balanced advantage funds) category in the long term,” said Arun Kumar, head of Research at FundsIndia as quoted by the report.

Notably, hybrid funds have given higher returns even in the longer time frame due to high allocation towards equity. Long term investors facilitated record monthly inflows via systematic investment plan (SIP) in the past two months, with inflows reaching to Rs 9,923 crore in August and Rs 9,608 crore in July. Several new investors are entering the market with hybrid categories along with new fund offers in the balanced advantage categories provided by fund houses are facilitating a boom in the sector.