Low risk, freedom to shuffle add sheen to hybrid funds: Experts

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Investors are gradually taking interest in hybrid funds, as they seek diversification in portfolios and lower tax incidence.

With the markets hitting all-time highs, inflows into equity funds — especially the small-cap category — have been quite healthy, but a large section of investors also fears a correction, say fund managers. The removal of the indexation benefit on funds of longer duration makes investing in categories such as the balanced advantage funds (BAFs) and multi-asset allocation funds an attractive option, they say.

“Both in a booming or correcting market, investors across the risk spectrum can consider investing in hybrid strategies, which hold the potential to deliver better risk-adjusted returns,” says S Naren, ED and CIO of ICICI Prudential Mutual Fund.

Data from Value Research show that over the last five years, the best performing BAFs have returned in the range of 10-15% range. Over the last three years, the return has been 12-26%. These are hybrid funds in which asset allocation changes based on market conditions.

The same for multi-asset allocation funds have shown returns in the 11-22% range on a five-year basis. On a three-year basis, returns are in the 17-34% bracket. Based on Sebi guidelines, these funds have to invest at least 10% of their portfolios in three or more asset classes.

“Specifically, at this time, we have seen a strong rally in the equity markets and valuations are above their long-term averages. Investors should take a measured allocation to equities, and the target allocation in an investor’s portfolio should be close to the median level,” says Mahesh Patil, chief investment officer of Aditya Birla Sun Life AMC.

Data from Value Research suggest that assets under management (AUM) of balanced advantage funds (BAFs) stood at Rs 1.96 trillion as of June 2023, a 16.15% increase from Rs 1.68 trillion as of June 2022.

As regards multi-asset allocation funds, the current AUM size is Rs 58,099 crore, up 43.16% from Rs 40,584 crore in June 2022. Devender Singhal, fund manager (equity), at Kotak Mahindra MF, calls multi-asset allocation funds the “ideal investment vehicle” for investors who wish to benefit from diversifying their exposure across asset classes, depending on factors like economic outlook, interest rates and market valuation.

According to him, the biggest advantage that hybrid funds such as the multi-asset allocation ones have over pure equity and debt schemes is that the investor has the freedom to move across asset classes without worrying about capital gains incidence while shuffling across asset classes.

In general, investors are advised not just to focus on returns, but on risk-adjusted returns.

“Diversification across asset classes is to reduce the overall risk of the portfolio owing to a negative correlation between various asset classes,” says Patil. That is where hybrid categories such as BAFs score more as they provide exposure to different asset classes such as equity, fixed income, commodities, and REITs/InvITs.

Patil points out that exposure to commodities such as gold provides hedge against spike in inflation, recession and geopolitical uncertainties. Overall, the risk-reward seems balanced across asset classes. Hence, he says, a multi-asset allocation approach remains well-suited for the current environment.


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