Rising equity market volatility fails to boost interest in hybrid funds

Inflows, folio additions decline for three straight months

Hybrid funds are witnessing a decline in investor interest despite mutual fund (MF) players and investment experts consistently recommending this category amid rising equity market volatility.

 

Net inflows and folio additions to hybrid funds — including balanced advantage funds (BAFs), multi-asset funds, and others — have been falling for three consecutive months.

 

In January 2025, the category added just 136,000 accounts, the lowest monthly figure since December 2023. Net inflows for the month stood at ₹4,476 crore, the weakest in 13 months. The net inflow data excludes arbitrage funds, given significant differences in their investor base and the nature of their inflows compared to other hybrid fund categories.

 

According to MF officials, the decline suggests investors may be holding cash to capitalise on potential equity market corrections.

 

Hybrid funds, particularly BAFs and multi-asset funds, have remained a favoured recommendation from fund managers and analysts for over a year. These schemes are considered safer than pure equity funds during periods of high market valuations and uncertainty. 

 

“BAFs dynamically allocate between equity and debt, based on market conditions, using indicators such as valuation, momentum, and earnings yield relative to G-sec yield. When equity valuations are high, equity exposure is reduced, and when valuations are low, equity exposure is increased. This makes them a suitable option to navigate expected volatility,” said Jiral Mehta, senior research analyst at FundsIndia.

 

Beyond BAFs, multi-asset funds and aggressive hybrid funds are among the most prominent hybrid offerings. Multi-asset funds allocate a portion of their corpus to gold and silver alongside equity and debt, while aggressive hybrid funds maintain a minimum 65 per cent equity exposure alongside debt investments.

 

Hybrid funds are often seen as all-weather options for risk-averse investors or those looking for a one-time investment.

 

“We expect the markets to remain in a corrective-to-consolidation phase for the next three-four months. Such phases should be used for gradual accumulation. For equity exposure, investors can consider lump-sum investments in hybrid and largecap equity-oriented funds,” stated Motilal Oswal Private Wealth in a recent note.

 

Investor interest in equity funds has also softened in recent months, as market corrections have eroded near-term returns. A slowdown in new fund launches has further contributed to the deceleration in equity investment accounts. In January 2025, folios in active equity funds increased by 3 million, down from 3.3 million in December 2024.