Arbitrage funds gaining steam

Mumbai: Hybrid funds are mutual fund schemes that typically invest in a combination of equity and debt securities and sometimes in other asset categories such as gold. The category has been attracting regular inflows since April 2023, after a change in taxation for debt funds that kicked off in the same month. Before that, the segment saw a net withdrawal of Rs 12,372 crore in March last year. According to the latest data with the Association of Mutual Funds in India (Amfi), hybrid schemes witnessed an inflow of Rs20,637 crore in January, which was higher than Rs15,009 crore inflow seen in December.

The two categories of hybrid funds that attracted most funds during the month under review are arbitrage funds and multi-asset allocation funds. Out of the Rs20,637 crore inflow in hybrid funds in January, arbitrage funds witnessed an inflow of Rs10,608 crore, while for multi-asset allocation funds it was Rs7,080 crore. Moreover, around 50 per cent to 70 per cent of the allocation in the hybrid category has been going towards arbitrage funds in the last six months. “The main reason for the increase in flows in this category is that they are being looked at as an alternative post-change in tax laws. Currently, arbitrage funds are sitting at a spread of around 8 per cent making it an attractive investment opportunity, especially on a post-tax basis,” Feroze Azeez, Deputy CEO, Anand Rathi Wealth Ltd, said. Besides, the multi-asset category, offering easy diversification, has become the investors' choice. In terms of folios, the segment added 3.36 lakh hybrid folios in the month under review, taking the total to 1.31 crore, representing a share of 7.7 per cent on the total folios of 16.95 crore.

Hybrid funds appeal more to investors with a moderate or low-risk profile. These funds are good investment options as they reduce the volatility associated when participating in equity markets while simultaneously providing stability in the fixed-income market. Market analysts believe that investors are looking to invest a portion of their fixed income exposure through hybrid funds after the change in taxation for debt funds. Under the new rules that kicked in from April 1, 2023 debt mutual funds held for more than three years will no longer enjoy indexation benefits. Indexation takes into account inflation during the holding period of a mutual fund unit and consequently increases the purchase price of the asset and this reduces the tax. The inflow has pushed the Average Assets Under Management (AAUM) of hybrid schemes by a staggering 40 per cent to Rs7 lakh crore in January-end from Rs 5 lakh crore in April. Within the hybrid schemes, the largest assets belong to the dynamic asset-allocation or balanced advantage category, with assets totalling Rs2.37 lakh crore.