Hybrid schemes, which invest in a mix of debt and equity instruments, are losing traction among mutual fund (MF) investors with the category seeing net outflows of over Rs 9,000 crore in current year.
“There have been concerns around few funds in some hybrid categories over exposure to lower-rated papers. There have also been concerns over inter-scheme transfers,” said Vidya Bala, co-founder of primeinvestor.in
The number of inter-scheme transfers, where debt instruments held in one scheme are sold to another scheme of the same fund house, saw a spike in April.
There were 680 such transactions worth Rs 22,452.7 crore in March. This rose to 829 (worth Rs 21,814.9 crore) in April.
In May, the combined net outflows in hybrid schemes (excluding arbitrage) stood at Rs 2,154.12 crore. For the year, the outflows are at Rs 9,295.92 crore.
“Panic set in as equity markets were not doing well and concerns over debt also heightened post-Franklin episode,” Bala added.
On April 23, 2020, Franklin Templeton Mutual Fund (MF) announced decision to wind-up six of its yield-oriented debt schemes amid liquidity crisis during lockdown conditions.
Within debt schemes, the Securities and Exchange Board of India (Sebi) has laid out what percentage of exposure a credit risk fund or a corporate bond fund can have to AA or higher-rated papers. But, there is no clear demarcation or stipulated limits on credit ratings that a hybrid fund can take exposure to.
The equity markets saw heightened volatility in May amid rising cases of Covid-19 patients, weak economic outlook and government's stimulus package unable to revive confidence.
In May, the 50-share Nifty was down 2.8 per cent after witnessing a strong recovery in the previous month. In year-to-date, the equity markets are still close to 18 per cent down.
In the same period, the aggressive hybrid category has given negative returns of 11 per cent. Balanced hybrid and conservative hybrid have given negative returns of nine and three per cent, respectively.
Hybrid funds have also lost sheen after tax treatment on dividends was revised.
“A fair bit of money in hybrid schemes used to go to dividend options. There is a good chance that money would have moved out,” said Kaustubh Belapurkar, director (manager research), Morningstar India.
“Hybrids were also used by first-time investors looking to come into equity markets through a graded approach. However, given market volatility, some investors may have moved to lesser volatile avenues,” he added.
At the end of May, the combined assets under management for the various hybrid categories (ex-arbitrage) stood at Rs 2.2 trillion, which was 23 per cent lower than combined asset size at the end of May last year (Rs 2.87 trillion).