Hybrid funds inflows rise 244% in October: Key factors driving the surge

Inflows into hybrid funds reached ₹16,863 crore in October, a significant rise of 244% from ₹4,901 crore in September, according to the Association of Mutual Funds in India (AMFI) data. Over the past year, hybrid funds have seen 74% growth in net asset under management (AUM), rising from ₹5.87 lakh crore to ₹8.72 lakh crore.

Additionally, the investor base has expanded by 23 lakh folios during this period.

This surge reflects a growing preference for balanced investments as investors seek stability amid market volatility, changing tax policies, and increased interest in diversified portfolios.

Key factors driving growth in hybrid fund inflows

Several factors are contributing to the rising demand for hybrid funds, and the market context offers a compelling explanation for the shift:

Market volatility and need for balanced returns: Given the current volatility in equity markets, hybrid funds provide a diversified portfolio of equity and debt, helping investors mitigate risks while staying poised to capture potential gains.

“Hybrid funds allow investors to benefit from equity’s growth potential while cushioning against downside risk through debt,” explains Abhishek Khudania, Senior Executive Director, Wealth, at Client Associates.

The fund category has shown resilience, even in flat equity markets, with balanced advantage funds delivering annual returns between 8-10%, demonstrating their ability to maintain stable performance.

Diversification and asset rebalancing at the fund level: Hybrid funds also simplify the investment process by managing asset allocation internally, meaning investors don’t need to juggle exit loads, tax implications, or market timing.

Khudania notes that these funds’ auto-rebalancing strategies alleviate common investor concerns.

Hybrid funds handle allocation adjustments automatically, making them an attractive option for those seeking steady, managed diversification without the headache of frequent trading decisions,” he says.

This internal rebalancing protects investors from both excessive losses in downturns and missed opportunities in rallies.

Tax efficiency amid new tax changes: Recent tax changes have made debt mutual funds less attractive due to higher post-tax returns on hybrid funds.

While traditional debt funds are now more likely to generate suboptimal returns after taxes, hybrid funds strike a more efficient balance by combining debt and equity in a single vehicle, leading to tax advantages.

Investors, recognising this shift, have moved funds from debt products to hybrid options.

Superior risk-adjusted returns and resilience in uncertain markets: Hybrid funds have consistently offered a solid risk-return profile, which is appealing to investors with moderate risk tolerance.

“Hybrid funds address two crucial investor needs: Capital protection and growth. By adjusting to market changes, they help investors bypass the anxiety tied to timing the market,” Khudania highlights.

He believes this unique structure helps keep fear and greed — two powerful investor emotions — at bay.

Heena Arora Agarwal, Founding Managing Partner at FundVice, notes, “Amid global economic uncertainties, traditional equity investments have become more volatile, prompting investors to seek balanced approaches.”

Hybrid funds serve as a strategic portfolio allocation, effectively mitigating market timing dilemmas.