New era dawns: Non-equity funds find their moment in balanced portfolios

Rally in gold and silver, choppy equity mkts nudge investors to multi-asset, debt-linked products. Is this tactical hop to what's hot or start of more balanced folios in Indian households?

The mutual fund (MF) industry has expanded rapidly in recent years, though its growth has been overwhelmingly driven by equities. 

 

Data on individual investors highlights this concentration: Roughly 80 per cent of all MF accounts are in equity schemes (including passives), and about 90 per cent of individual investor assets are held in active equity funds.

 

This skew is hardly surprising.

 

Most investors enter MFs seeking higher returns than traditional fixed-income instruments can offer, and equities have historically outperformed within the MF universe. Tax advantages have further reinforced their appeal over other categories. Moreover, investors who have stayed invested for the medium to long term have generally seen positive outcomes — leaving little incentive to diversify beyond equities.

 

That pattern, however, is beginning to shift.

 

Recent phases of market corrections and volatility, along with changes in tax rules and strong performances in non-equity segments, are prompting investors to explore other options.

 

In calendar year 2025, the industry has witnessed a noticeable rise in new accounts and inflows into gold and silver exchange-traded funds (ETFs), fund of funds (FoFs), multi-asset schemes, and even select fixed-income products such as liquid funds. The shift is visible in the folio data: The share of active equity schemes in total MF folios — which had climbed from 66 per cent in January 2023 to 69 per cent in January 2025 — has eased to 67 per cent as of October 2025. 

 

MF schemes dedicated to gold and silver have been the biggest beneficiaries, as the equity market slump has coincided with a sharp rally in precious metal prices. Investor interest in these schemes were so strong that gold and silver ETFs alone outpaced all active equity schemes in net new account or folio additions in October. Gold and silver ETFs added 2 million accounts in October, almost 30 per cent more than net additions in active equity schemes.

 

The gold and silver rally — and the equity volatility — also benefited multi-asset funds. Investors have pumped over ₹34,300 crore into the hybrid MF category this year as they have showcased their ability to deliver during periods of equity volatility.

 

While the interest in commodity and multi-asset schemes has largely been driven by recent performance, the humble liquid fund has benefited from growing awareness of its varied use cases. The category has added the highest number of investment accounts in the debt segment in 2025, at 428,000. The growing retail participation in liquid funds, despite their low return potential, is linked to their emergence as an alternative to savings accounts for parking surplus cash, and the increasing use of systematic transfer plans (STPs) for deploying lump-sum money into equity schemes. Investors generally use liquid funds as the source scheme in STPs.

 

According to Kalpen Parekh, managing director and chief executive officer (CEO) at DSP MF, the growing interest in non-equity schemes signals a shift in perception of MFs. “Investors are no longer viewing MFs as only an equity product. The rise in non-equity flows shows that households are beginning to use MFs as a single platform to manage liquidity, diversify through gold and silver, and earn fixed-income returns,” he said.

 

Is this trend structural or only an investor reaction to the changed market conditions? It will depend, says Swarup Mohanty, vice-chairman and CEO, Mirae Asset Investment Managers (India). “Whether the trend sustains depends largely on how investor behaviour evolves. If the movement towards goal-oriented investing continues, non-equity categories may find a more consistent place in portfolios. The direction of that shift is ultimately behavioural,” he said.

 

The simplification of capital market and MF tax structures in 2024 has also provided MFs the scope to launch tax-efficient fixed-income funds. The newly introduced income-plus-arbitrage FoF category — which delivers fixed-income-like returns but with tax efficiency — now manages nearly ₹23,000 crore across 20 schemes. “Thanks to the 

 

tax change, domestic FoFs have also become popular. The returns are taxed at 12.5 per cent if the units are held for over two years,” said Kailash Kulkarni, CEO, HSBC MF.

 

According to MF executives, the diversification of investor flows is also beneficial for fund houses. A broader mix of inflows, they say, will help them manage assets more efficiently, reduce dependence on equity cycles, and build more stable, predictable revenue streams.

 

The next frontiers

 

This year has also witnessed the creation of new product possibilities that could expand the asset allocation horizon of MFs and pave the way for more use case-specific inflows.

 

MFs, in the future, could emerge as a pathway for real estate exposure as well. MF schemes — which already carry some allocations to real estate investment trusts (Reits) — are expected to increase their exposure now that the asset class has been classified as “equity” for MFs. The new classification also opens the door to Reit-oriented schemes in the future.

 

“The equity classification is a pivotal step that can accelerate the growth of this asset class. It will lead to higher liquidity through potential index inclusion, a broader investor base, and greater participation from equity MF schemes,” said Shariq Merchant, investment director, WhiteOak Capital Asset Management Company.

 

Specialised investment funds (SIFs) are also emerging as a key area. The new product line within the MF canvas has allowed fund houses to design strategies that cater to investment needs not currently addressed by existing MF schemes.

 

“SIFs offer differentiated risk/reward profiles, cater to specific financial goals, and provide access to strategies that were previously difficult to reach through the standard MF route,” said Himanshu Srivastava, associate director, manager research, Morningstar.

 

Most launches in this space so far have focused on steady income generation rather than return maximisation. After the tax change for debt schemes in 2023, MFs have tried to meet this demand through hybrid schemes like arbitrage, income-plus-arbitrage, equity savings, and even multi-asset funds. SIFs, however, could emerge as the preferred alternative for investors looking for regular income due to their higher return potential.

 

“As investors seek better downside protection and smoother returns, we expect SIFs to move from niche­ adoption to a meaningful allocation category over the next five years,” said Shaily Gang, products head, Tata Asset Management.

 

SIFs are also expected to expand the investor base of MFs as their high-risk strategies may appeal to alternative investment fund and portfolio management services investors. “Currently, the MF space encompasses a wide variety of investors and naturally there is a demand for more evolved products beyond the traditional ones — primarily from high networth individuals and family offices,” said Sundeep Sikka, executive director and CEO, Nippon Life India Asset Management.

 

Cash is restless — and it’s flowing into liquid funds

 

Debt-oriented schemes continue to be dominated by institutional investors, but one subcategory — liquid funds — is increasingly finding its way into retail portfolios.

 

The total number of liquid fund accounts rose to 2.28 million in October 2025, the highest level in at least five years. This year alone, the segment has added about 430,000 accounts — a sharp increase from the muted additions seen between 2022 and 2024.

 

A key driver has been the widening return gap between savings accounts and liquid funds. Average liquid fund yields remain in the 5–6 per cent range, whereas savings account interest rates offered by several banks have dropped below 3 per cent.

 

Retail participation has also been lifted by the growing popularity of systematic transfer plans (STPs). During market volatility, many advisors encourage investors to deploy lump-sum equity investments gradually through STPs, often using liquid funds as the source scheme. Broking platforms promoting the parking of idle cash in liquid funds have further aided this trend.

 

Innovation on the distribution side is adding another layer of momentum. Bengaluru-based financial technology firm Curie Money recently enabled Unified Payments Interface-based transactions through liquid funds, making short-term money management even more seamless.

 

Jimmy Patel, managing director at Quantum Mutual Fund, believes liquid funds could eventually compete with savings accounts, provided regulatory conditions evolve. “Liquid funds can become even more popular if the current ₹50,000 limit on instant redemptions is significantly raised,” he said. “That said, savings accounts still offer certain conveniences, such as cheque issuance and instant transfers.” 

 

Why investors can’t get enough of gold and silver ETFs

 

Gold and silver exchange-traded funds (ETFs) have dazzled investors in 2025, as a stellar rally in precious metal prices have drawn unprecedented interest.

 

Assets under management in gold ETFs have more than doubled this year, surging from ₹44,596 crore in December 2024 to over ₹1.1 trillion by November 1, 2025. Silver ETFs have expanded even faster, rising from ₹12,317 crore to ₹49,046 crore during the same pe­riod. The momentum has intensified in recent months, with both categories witnessing record inflows between August and October.

 

Several factors have led to this surge.

 

Budget 2024 reintroduced long-term capital gains taxation for all non-equity mutual fund categories — except debt — making gold ETFs more attractive. Currently, gains from gold ETFs held for at least two years are taxed at 12.5 per cent. Moreover, the government’s suspension of new sovereign gold bond issuances this year diverted a portion of investor flows towards ETFs.

 

According to Vishal Jain, chief executive officer of Zerodha Fund House, the growing appeal of gold and silver ETFs could mark a structural shift in how Indians invest in precious metals. “The decision to allocate a greater share of ‘investment gold’ through ETFs and fund of funds is a pragmatic move,” he said. “These instruments eliminate the inefficiencies of physical gold — such as making charges, purity risks, and storage costs — while offering flexibility through systematic investment plans, smoother asset allocation, and easy portfolio rebalancing.” 

 

MFs’ growth trajectory holds despite equity turbulence

 

The growth story of the Indian mutual fund (MF) industry remains largely on track in 2025, even as the bulk of its investors have faced the first real equity test this year. While the net inflows into equity schemes have moderated to an extent, the systematic investment plan (SIP) inflows has continued to swell. At the same time, a jump in investments in multi-asset funds and commodity funds like gold and silver exchange-traded funds (ETFs) has more than offset the equity inflow decline. However, there are some aspects where there has been a slowdown. For example, the new investor addition. In the first 10 months of 2025, the industry has added around 5.3 million investors compared to a 10.5 million surge in 2024. 

 

SIPs continue record inflow run

 

SIP inflows continued to power domestic mutual fund growth even as one-time investments slowed in 2025 amid equity market corrections. SIP inflows also proved to be an important pillar in the resilient domestic flows this year and helped cushion the impact of outflow of foreign capital from the equity market.

 

Small-town growth story remains intact

 

The equity market volatility not only had a limited impact at the overall level, but also at the various segments, with smaller-town investors continuing to expand their MF holdings at a rapid pace. Industry data shows that smaller towns (those beyond the top 30 cities or B-30) are set to outpace the top-30 cities for a third straight year in 2025, supported by stronger inflows and higher mark-to-market gains.