Hybrid funds can help investors weather choppy equity markets

Indian equity markets are witnessing intense volatility due to the geopolitical tensions and imminent interest rate hike by the US Federal Reserve (US Fed).  In this backdrop, mutual fund (MF) players recommend that investors stick with hybrid funds as they have lower volatility than pure equity funds.

In the last three months, on an average, large-cap funds have declined by 3.7 per cent, while small and mid-cap funds have delivered negative returns. Several hybrid funds have seen lower declines than the markets and given negative returns in the range of 1-2 per cent in the last three months. The data from Value Research shows that dynamic asset allocation funds are down by nearly 2 per cent, while balanced hybrid funds are down 1.5 per cent.

Balanced hybrid funds invest between 40 per cent and 60 per cent of total assets in equity and debt. Under dynamic asset allocation funds, also called balanced advantage funds (BAFs), assets are dynamically managed between equity and debt.

Edelweiss MF in a note on Edelweiss Balanced Advantage Fund stated that, “Inflation concerns and hawkish commentary from the US Fed had led to near-term uncertainty in the equity markets. We expect a small bout of corrections followed by earnings upgrades that will drive the market upwards. Therefore, a dynamic asset allocation fund will deliver better risk adjusted returns in such a scenario.”

Lately, investors have shown faith in BAF and hybrid funds. 

The data from Association of Mutual Funds in India (Amfi) shows that net assets of BAF as of January stood at Rs 1.73 trillion, against Rs 1.16 trillion a year back.