Hybrid Funds in Demand: Is It the Gold Rush Or The Need For Stability?

In a market environment marked by heightened uncertainty, hybrid funds have started regaining investor attention, says a report by DSP Mutual Fund. According to the report, the preference for hybrid funds is visible through their rising share of equity flows. It further suggests that investors are leaning towards hybrid funds as they offer a balance between equity participation and downside protection, rather than purely equity-based strategies. However, some financial advisors hold a different view.

Hybrid funds, as defined by the market regulator, Securities Exchange Board of India (Sebi), are of seven types: Conservative Hybrid Funds, Balanced Hybrid Funds, Aggressive Hybrid Funds, Dynamic Asset Allocation or Balanced Advantage Funds, Multi-Asset Allocation Funds, Arbitrage Funds, and Equity Savings Funds.

Conservative hybrid funds, as the names suggest, are conservative in nature. They have to invest between 75 per cent and 90 per cent of their total assets in debt. They can invest the remaining in equities.

Aggressive hybrid funds, on the other hand, can invest anywhere between 65 per cent and 80 per cent in equities and the remaining in debt.

Balanced Hybrid Fund, as the name implies, can invest between 40 per cent and 60 per cent in equities and the remaining in debt.

Why Are Investors Flocking To Hybrid Funds?

“In a market environment marked with heightened volatility, many people prefer a smoother experience — equity for long-term returns and debt for cushioning,” says Bhavesh Jain, Co-Head – Factor Investing, Edelweiss Mutual Fund. Investors are moving towards hybrid funds, Jain adds, because they offer a simple way to balance growth and stability.

Hybrid funds, by definition, give that mix in one product, without investors having to manage asset allocation on their own.

Some advisors, however, attribute the rise in inflows in the hybrid category of funds to the surge in gold prices.

According to Saurabh Mittal, CFA, founding director, Circle Wealth Advisors, investors are flocking to invest in gold through multi-asset funds, which is a type of hybrid fund, and that is why the inflows in the category are blowing up.

Multi-Asset Funds, as defined by Sebi, can invest in at   least three asset classes with  a minimum allocation of at least 10 per cent each in all  three.

To understand multi-asset allocation funds better, let’s look at the current portfolio of the largest fund in the category– ICICI Pru Multi-Asset Fund. It invests in equities, debt, commodities (mainly in gold and in silver too), and Real Estate. Going by the latest portfolio disclosures, as at October 31, 2025, the fund had invested 10.07 per cent in commodities, including gold and silver.

The chart below clearly shows a spike in the inflows in multi-asset allocation funds since March this year.

“The rise in inflows (in multi-asset funds) coincides with the rise in gold prices,” adds Mittal, the Mumbai-based financial advisor.

Gold prices have risen by a massive 47 per cent from close to Rs 86,000 for 10 grams in March this year to over Rs 1,26,000 per 10 grams now.

Multi-Asset Allocation Funds are topping the charts

In the last year, after silver, gold, and international funds, next in line are the multi-asset allocation funds, topping the charts with an average return of 14.75 per cent. Other hybrid fund categories – aggressive hybrid funds have grown by an average of 7.98 per cent, and conservative funds have delivered 6.54 per cent returns.

Who should invest in Hybrid Funds?

While industry veterans ask investors not to chase any kind of mutual funds just for higher returns, they believe hybrid and multi-asset funds are well-suited for investors who want a balanced approach in their investing. “For those who seek growth through equity but also want stability through debt,” says Jain of Edelweiss Mutual Fund. He adds that these funds work best for people with a moderate risk appetite, a medium-to-long-term horizon, and a preference for smoother return experiences compared to pure equity funds.

However, to benefit from this auto rebalancing of asset allocation in hybrid funds, investors should have a considerable portion of their portfolio, say, 70 to 80 per cent, in them, suggests Saurabh Mittal. “If you are looking for some benefit of diversification through these funds, just having 10-20 per cent of your portfolio in them will not do the job,” he adds.

Investors should also consider their risk appetite before investing in them.

Are Hybrid Funds Risky?

Hybrid funds offer a good balance of equity, debt, and other asset classes like commodities over a long period of time, but investors must beware of the risks involved.

Bhavesh Jain cautions investors about the risks these funds carry due to their equity exposure and thus, a certain amount of volatility. He says, “they shouldn’t be seen as a substitute for pure debt just for tax benefits.”. The right way to use hybrid funds, as per Jain, is to match them with one’s risk appetite and time horizon.

On the debt side, Mittal advises investors to exercise caution when selecting the quality of securities held in the scheme's debt portfolio. “Some fund managers may get aggressive and go for AA or low grades of credit papers to enhance the return of the debt portion.”

He advises investors not to invest in funds with high credit risk when considering hybrid funds. “Make sure the credit quality is decent.”