Use hybrid funds to tide over market volatility, say fund managers

Monetary tightening by the US Federal Reserve and fears of global recession have led to a sharp fall in equities and rise in bond yields. Investors believe the market will continue to see turbulence as central banks are in the beginning of a rate-hike cycle.

Given the change in market dynamics, mutual fund (MF) players are advising investors to opt for hybrid funds — a low volatile option, compared to pure-play equity funds.

In the past three months, large-cap funds are down 5.57 per cent on average. Mid-cap and small-cap funds have given negative returns of 4 per cent and 5.18 per cent, respectively, in the same time frame.

Hybrid funds haven’t fallen as much, with returns in negative 1-3 per cent.

The data from Value Research shows that conservative hybrid funds are down nearly 1.5 per cent; equity savings funds are down 1.9 per cent.

There are several categories of hybrid funds ranging from aggressive to conservative, depending on investor risk appetite.

Conservative hybrid funds invest 75-90 per cent in debt; the rest in equities. Equity savings funds can invest in a mix of equity arbitrage and debt.
 

G Pradeepkumar, chief executive officer, Union Asset Management Company, says, “Balanced advantage funds (BAF) are all-season funds. They can be bought by investors any time. With sharp corrections in Indian markets, long-term investors can start getting into equity funds through systematic transfer plans from debt in the next few months.”

Balanced hybrid funds invest 40-60 per cent of total assets in equity and debt. Under dynamic asset allocation funds — also called BAF — manage assets dynamically between equity and debt, depending on market conditions and in house models. If valuations of equity markets are high, invest in debt and vice versa.

Many investors seem to be flocking to hybrid funds. The data from the Association of Mutual Funds in India shows that net assets of hybrid funds as of April stood at Rs 4.85 trillion, compared with Rs 3.51 trillion a year ago.

Edelweiss MF in its note on Edelweiss BAF stated that, “The ongoing crude and commodities shock in the wake of the Russia-Ukraine conflict has led to negative implications on global growth after Covid. This has accentuated an already highly volatile market led by hawkish commentary and inflation concerns. Therefore, a dynamic asset allocation fund will deliver better risk-adjusted returns in such a market scenario.”