As with direct stock investors, mutual fund holders, too, would have faced significant erosion in their portfolio values over the past six months, from late September on.
Equity-oriented schemes across all categories saw a decline in their assets under management (AUM) between September 2024 and February 2025, despite receiving positive monthly inflows during the period, as the market fall caused significant value erosion.
However, three hybrid categories have defied the trend and their AUMs have risen. Interestingly, of the three categories, arbitrage funds have recorded positive returns over the September-March period, while equity savings and multi-asset allocation funds have fallen much lower than the Nifty 500 TRI.
Receiving the flows
From the market highs made in September 2024, the Nifty 500 TRI has corrected 17.4 per cent.
The arbitrage funds category delivered a positive 3.5 per cent returns over the above period. These funds, which commanded an AUM of over ₹2-lakh crore as of February, per AMFI data, saw inflows increase by 4.1 per cent in the past six months. Arbitrage funds invest predominantly in derivatives and use cash-futures and covered call option strategies. These are applied to individual stocks as well indices.
Equity savings funds, which invest in stocks and arbitrage opportunities, saw a fall of only 2.6 per cent in the September-March period. But AUMs increased 11.6 per cent.
Riding on rising gold prices, multi-asset allocation funds that invest in equities, bonds and commodities (gold, silver) were able to restrict their fall as a category to only 7.3 per cent in the six-month period. Gold prices rallied 14.6 per cent in this timeframe and these funds invest 10-20 per cent of their portfolio in the yellow metal. Managing over ₹1-lakh crore, multi-asset allocation funds saw a 10.2 per cent rise in AUM over the past six months.
All categories of equity-oriented funds and even hybrid schemes saw a fall in AUM in September-February.
Hybrids preferred
Arbitrage and equity savings funds mostly try to generate returns via the derivatives route. They usually employ relatively safe strategies that have been mentioned earlier. The idea is to earn debt-like returns from these funds. These arbitrage funds gave around 6 per cent on an average on 1-year rolling returns over 2020-25.
The sweetener is that arbitrage and equity savings funds enjoy equity taxation. So, gains above ₹1.25 lakh are taxed at 12.5 per cent on holding periods of more than one year. The combination of the above two factors explains the heightened investor interest in these two categories, though lucrative arbitrage opportunities may not always be readily available.
For multi-asset allocation funds, the added glitter of exposure to a rallying gold has drawn investors. These funds also mostly enjoy equity taxation as the overall exposure to stocks (and derivatives) is kept at or more than 65 per cent of the overall portfolio.
Multi-asset allocation funds may better serve the interests of investors with a moderate risk appetite as they provide access to multiple asset classes via a single product and ensure robust portfolio diversification via investments in uncorrelated assets.