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With corporate earnings growth tapering and global headwinds strengthening, hybrid funds offer the best risk adjusted returns to investors, said market experts at Mint’s 17th BFSI Summit in Mumbai on Friday.
Hybrid funds have well-balanced portfolios of debt and equity to take advantage of the best of all asset groups, the experts said, adding that investors should temper their equity return expectations as volatility will be a persistent theme in the medium term.
“Over a span of three or four decades, around 25% of the times equities have underperformed assets like bonds, returning less than 7-8% annually particularly during times of volatility,” Kalpen Parekh, managing director and chief executive of DSP Mutual Fund, said at the summit.
The benchmark Nifty 50 index returned only about 9% in 2024, much lower than 2023’s 19%. After a post-covid bull run for three years, investors felt the tremors of a volatile market in 2024 as corporate earnings growth started slowing in the second half of the year. Lower government spending, moderating household credit, sticky inflation and slow urban consumption hit corporate earnings for the better part of 2024-25.
Earnings per share downgrades have accelerated over the last six months as profit margin tailwinds continue to taper for India Inc, making it hard for Indian equities to justify their lofty valuations and resulting in steep corrections.
“We are seeing a meaningful correction for the first time in four years. Moderation of economic and corporate growth has led to time and price corrections in markets recently,” Navneet Munot, chief executive of HDFC AMC, said at the summit. “However, such corrections are a part and parcel of investing. There are no structural issues with Indian corporates.”
While experts anticipate pockets of narrative-driven froth and exuberance in the small-cap, mid-cap and IPO segments, they believe large-cap stocks are marginally overvalued but offer better risk-adjusted return opportunities in the near term. Even though they think India’s domestic issues are transitory, they have little clarity on uncertainties emerging on the global front.
“With Trump taking charge next week, we don’t know what US’ policies will be in the next four years. I’m concerned about tariff impositions,” Sankaran Naren, executive director and chief investment officer at ICICI Prudential Mutual Fund, said at the Mint BFSI summit.
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Global markets have been reeling under the pressure of a strengthening US dollar, particularly after Donald Trump’s victory in the US presidential election in November.
Investors have been betting on a stronger US economy and sustained inflationary pressures once Trump takes office as president this month, leading to moderation of interest rate cut expectations in the US in 2025. This has resulted in a stronger dollar and a rise in US treasury yields, turning riskier assets like emerging market equities unattractive for foreign investors.
Nuvama Institutional Equities believes that continuous foreign institutional investor selling will stall the performance of Indian equities, especially in cyclical, small-cap and mid-cap segments.
In volatile times like this, hybrid funds act like multivitamins for investors seeking a consistent stream of returns.
Also read | The market in 2025 will be a story of two halves
“Multi-asset portfolios with low asset-correlation perform better in volatile markets. However, in a very long run they underperform equity funds,” said Parekh of DSP Mutual Fund said. “They are great for compounding but not for tactical returns.”
Parekh agreed that the expense of investing in hybrid mutual funds is higher than the costs incurred in self-allocation of money to different assets. But he argued that the automated structure of such funds provides the advantage of timely rebalancing.
Given current market conditions, Naren of ICICI Prudential Mutual Funds said he preferred a balanced hybrid fund with some amount of gold in portfolios, as well. “If there is further correction (in stocks), I’ll pivot to aggressive hybrid funds,” he added.
While mutual fund experts advocated for more hybrid fund or multi-asset fund allocations for long-term disciplined investing, they also highlighted current debt fund taxation rules to be a challenge for such investments.
As per Budget 2024’s amendment in the taxability of debt, specified mutual funds can no longer avail the benefit of indexation while calculating long-term capital gains. So, debt mutual funds will be taxed at applicable slab rates, which will ultimately eat up investor returns.
“A favourable view towards debt fund taxation in the upcoming budget will help in better financialisation of the nation’s savings and not just equitisation,” said Munot of HDFC AMC. “It will also help develop our corporate bond markets which will bring more diversity to hybrid funds.”
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