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Are balanced and aggressive hybrid funds going out of favour?

Balanced advantage funds, also known as dynamic asset allocation funds, saw a continuous uptick in their monthly inflows, which rose from Rs 1,362 crore in May to Rs 2,056 crore in June 2021.

July 09, 2021 / 05:29 PM IST

Fund flows for balanced and aggressive hybrid funds nosedived for the sixth month in a row, the monthly data released by the Association of Mutual Funds of India (AMFI) indicated. The first quarter (January-March 2021) saw almost Rs 5,000 crore going out of such funds, and June was no different, with almost Rs 300 crore flowing out of the same. 

The overall data, however, indicated positive investor sentiment, in line with the strong rallies of emerging stocks. For June, equity-oriented funds mobilised around Rs 5,988 crore, falling from Rs 10,082 crore in May. At the same time, Systematic Investment Plan (SIP) contribution also saw an uptick from Rs 8,818 crore in May to almost Rs 9,100 crore in June.

At the same time, balanced advantage funds, also known as dynamic asset allocation funds, saw a continuous uptick in their monthly inflows, which rose from Rs 1,362 crore in May to Rs 2,056 crore in June 2021. 

While most people confuse balanced/aggressive hybrid and balanced advantage funds, investor inclination towards the latter is clearly visible. While balanced hybrid funds saw outflows, dynamic asset allocation funds saw a corresponding surge of funds (Rs 5,375 crore) in the first quarter of 2021.

What’s the difference?

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On the face of it, you might not see much difference between the two fund categories. Both these funds invest in equity and debt asset classes, striking a balance between capital appreciation and protection from market ups and downs. 

The major difference, however, is the frequency and range of allocating such assets. Conventionally, Balanced hybrid funds invest around 65 percent of their total assets in equities, which can help them ride the market momentum, and the rest in debt and related securities, which work as a stabilising cushion against equity volatility. 

Aggressive hybrid funds, on the other hand, invest about 75 percent in equities and 25 percent in debt instruments. But this allocation is not dynamic or subject to change per the market conditions, as is the case with balanced advantage funds. This means that balanced hybrid funds do not allow you to take complete advantage of the prevailing stock market sentiments. 

This is something that a balanced advantage fund does better by dynamically and actively changing allocation percentages depending on which asset class between equity and debt is performing better in the market. 

Understand this through our men in blue. Ajinkya Rahane is one of the best cricketers in the country, but he is most suited for the steady playing conditions of a test match, as compared to other formats. That’s a balanced hybrid. But when it comes to hitting sixes and closing in on a run-chase, the team turns to Captain Virat Kohli, who adapts equally well to playing in all the three formats of the game, be it tests, ODIs, or T20s. That's a balanced advantage for you!  And then there’s Hardik Pandya, who goes after every ball, ensuring it leaves the stadium. That's an aggressive hybrid.  

Even in balanced advantage funds, there is significant variance over equity allocation. The latest disclosures suggest that it ranges anywhere between 25 and 80 percent. So, remember that even balanced advantage funds cannot completely protect you from market downsides, but with some amount of debt component and changing asset exposures as per the market conditions, they can certainly safeguard and balance your returns. 

It is also important to check the asset quality in these funds, says Nema Chhaya Buch, a Pune-based financial strategist. “Ensuring high-quality investment-grade bonds, government securities when it comes to debt and sound large-cap, blue-chip companies in equity are essential. Also, even in hybrid funds, the choice must reflect the risk appetite of the investor. Don’t simply go by the returns generated,” she said. 
Time PeriodBalanced Hybrid Funds (Returns in percent)Aggressive Hybrid Funds (Returns in percent)

Balanced Advantage/ Dynamic Asset Allocation funds

(Returns in percent)
1 year28.7942.1225.05
3 years10.2112.479.23
5 years9.0612.159.01
10 years 9.9812.0610.31
Source: ValueResearchViral Bhatt, who runs MoneyMantra, a personal finance advisory firm in Mumbai, says that balanced advantage funds are good, because they serve the dual purpose of growth and protection, along with actively restoring balance in portfolio when either the equity or debt market is overvalued. “The mixed portfolio of equity and debt makes these schemes relatively safer than pure equity funds that invest most of their corpus in stocks. The debt part of the portfolio offers stability while the equity would help investors to earn a little extra return from these schemes,” he elaborated.
Ira Puranik

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