Funds flexing 60/40 playbook become investor favorites in India

Indian funds that offer built-in diversification by combining stocks with assets such as bonds and gold lured in more money than pure equity ones last month for the first time in a year, pointing toward a potential long-term investment shift.

The so-called hybrid plans attracted a net 208 billion rupees ($2.4 billion) of inflows in May, while stock funds garnered just 190 billion rupees, according to data from the Association of Mutual Funds in India. The switch comes as global geopolitical turmoil escalates and Indian equities trail their worldwide peers amid concern over weaker earnings growth.

Bloomberg

“Investors are taking a break and are hedging some of their assets into hybrid funds,” said Sailesh Jain, who oversees more than $4 billion as a money manager at Tata Asset Management Pvt in Mumbai. “These funds are a perfect mix during such uncertain times as they offer growth potential by staggering equity investments and generate income through debt investments.”

Potential buyers are also shying away from Indian shares as they appear pricey based on valuation metrics, while interest in pure bond funds has been damped by the diminishing prospect of future central bank interest-rate cuts, Jain said.

The growing demand for hybrid funds may indicate the huge popularity of equity investments is starting to wane in the world’s most populous economy. The flow of money from retail investors into the stock market has been one of the drivers helping the MSCI India Index deliver average gains of almost 15% a year over the past six years, outpacing most of its global peers.

Bloomberg

The two most popular categories of hybrid funds in May were multi-asset and arbitrage schemes. The former must have investments in at least three asset classes with a minimum allocation of at least 10% in each, according to the market regulator’s guidelines. The latter must have a minimum of 65% in equities or equity-related products, and a maximum of 35% in debt.One of the advantages of hybrid funds is their tax efficiency. Arbitrage funds that invest both in stocks and bonds are taxed at the same rate as stocks, even though they offer exposure to debt. Pure bond funds, on the other hand, are taxed at a higher rate.Multi-asset funds that invest in precious metals such as gold have also lured in higher inflows due to the record-breaking rally in bullion. Such funds saw their assets under management climb to an all-time high of 1.2 trillion rupees at the end of May, based on data from the mutual fund association.

The performance of Indian stocks has started to improve in recent months, with the MSCI India gauge climbing about 16% from a one-year low set in February. At the same time, recent threats such as rising global trade frictions and geopolitical conflicts still argue for diversification.

“Given persistent geopolitical headwinds, hybrid funds may offer better risk-reward notably in the context of India’s expensive valuations and sluggish earnings growth,” said Nitin Chanduka, a strategist at Bloomberg Intelligence in Singapore.