Does Switching to Hybrid Mutual Funds Make Sense Amid Volatile Markets?

The key factor behind the market correction has been US President Donald Trump's protectionist policies and their impact on global trade. For the unversed, the Trump administration has vowed to impose a 25% tariff on Canada and Mexico, and 10% on China. He has also announced 25% tariffs on all steel and aluminium imports and has proposed plans to impose reciprocal tariffs.

As we can see in the below graph, India's Volatility Index or VIX spiked soon after U.S. President Donald Trump's victory, reflecting the growing concerns about his trade policies.

Adding to this uncertainty, several factors are contributing to market turbulence, such as:

• The launch of DeepSeek by China, a low-cost AI model that could change the face of AI and pose a challenge for global AI leaders

• Geopolitical tensions in many parts of the world

• A slowdown in GDP growth amid a slump in manufacturing sector

• Chances of inflation moving due to higher tariffs and climate risk

• Corporate earnings entering the slow lane from Q2FY25

Consequently, Foreign Institutional Investors (FIIs) have been withdrawing heavily from emerging markets, including India. In January 2025, they net sold equities worth Rs 78,000 crore, though strong participation from domestic investors mitigated the losses.

Mid-cap and small-cap stocks have been hit particularly hard by the market volatility. While these segments have attracted much investor enthusiasm owing to their potential for higher returns, they tend to experience a sharper downswing during market corrections.

In these times of turbulence, the BSE MidCap and BSE SmallCap indices are down 15% from their respective peaks. As of February 10, 2025, both indices have dropped by 9% and 11%, respectively on a year-to-date basis.

Investors in equity mutual funds too have witnessed a substantial drop in the value of their portfolio amid the recent market correction.

How Can Hybrid Mutual Funds Help You Navigate Market Volatility

Hybrid mutual funds allocate investments across a mix of asset classes, primarily equity and debt, to maintain a balanced portfolio. Their primary objective is to manage risk through diversification while generating reasonable returns.

This strategic asset mix allows hybrid funds to absorb market shocks more effectively than pure equity funds. At the same time, they offer a higher growth potential compared to fixed-income investments.

During periods of economic uncertainty, the debt component in hybrid funds helps cushion the portfolio against potential equity downturns.

Hybrid mutual funds come in several types, each with a distinct asset allocation strategy. Some funds have a higher equity exposure to focus on capital appreciation, whereas others prioritise debt to enhance stability.

This diversified asset mix and tailored risk options make them suitable for investors with varying risk appetites, from conservative to aggressive.

For instance, Aggressive Hybrid Funds suit high-risk investors looking for growth with stability; and Multi-Asset Allocation Funds cater to moderate-to-high-risk investors.

Here are some of the Hybrid Funds that investors can consider to reduce the impact of market volatility on their investment portfolios:

• Aggressive Hybrid Funds

  These funds allocate 65-80% of assets to equities and 20-35% to debt instruments, offering the potential for higher returns but carrying an increased risk due to greater equity exposure. They are well-suited for investors who can tolerate some market fluctuations while pursuing long-term capital appreciation and stability.

• Multi-Asset Allocation Funds

  These funds invest across three or more asset classes, such as equity, debt, and gold, with a minimum allocation of 10% in each. The diversified strategy helps mitigate risk while optimising returns under varying market conditions.

• Conservative Hybrid Funds

  These funds allocate 75-90% to debt and 10-25% to equity. The primary objective of these funds is to generate steady growth of capital through the debt component while aiming for moderate returns from the equity component. They are suitable for low-risk investors looking for stability with limited equity exposure.

Benefits of Investing in Hybrid Mutual Funds

Hybrid mutual funds come with several benefits that make them a prudent addition to your portfolio in the current market scenario:

• Diversification with a Single Investment By investing in both equity and debt markets within a single fund, hybrid funds help spread risk across different asset classes. Hybrid funds generally exhibit lower volatility compared to pure equity funds, helping investors earn decent risk-adjusted returns over a period.

• Balanced Approach to Risk and ReturnsHybrid funds aim to strike a balance between risk and return. The equity portion contributes to capital appreciation, while the debt component provides stability and mitigates the impact of market fluctuations.

• Professional Fund ManagementProfessional fund managers actively monitor market trends and adjust asset allocation accordingly. This ensures that you, the investor, have the opportunity to earn optimal returns while navigating market volatility.

• Tax EfficiencyHybrid funds with a higher allocation in equity, such as aggressive hybrid funds (equity allocation of over 65%), get the same tax treatment as equity funds. This can lead to a more tax-efficient investment compared to pure debt funds for certain investors.

As we can see from the above graph, Aggressive Hybrid Funds and Multi-Asset Allocation Funds have managed downside risk better than pure equity funds such as Large Cap Funds and Multi Cap Funds during bear markets.

For instance, in the January 2020 to March 2020 bear market, Multi-Asset Allocation Funds experienced a significantly smaller negative return compared to Large Cap and Multi Cap Funds. Aggressive Hybrid Funds demonstrated nearly similar resilience, showcasing their ability to mitigate risks in turbulent market conditions.

This resilience is likely due to the diversified asset allocation across both equity and debt (with Multi-Asset Allocation Funds also incorporating gold). Meanwhile, they did not compromise much on the returns aspect during bullish phases.

This balanced performance across market cycles makes them suitable options for investors seeking growth with a degree of stability in volatile markets.

To Conclude...

In today's volatile market conditions, hybrid mutual funds present a balanced investment option, offering a mix of stability and moderate growth.

Their diversified approach can help build a resilient portfolio that is equipped to weather market turbulence.

That said, selecting the right hybrid mutual fund requires careful evaluation of both quantitative and qualitative factors. Analysing past performance, risk-reward ratios, and the respective fund house's processes and systems is crucial before making a decision.

If you're uncertain about which hybrid mutual fund aligns with your financial objectives and risk appetite, don't hesitate to seek advice from a SEBI-registered investment advisor.

Be thoughtful in your approach.

Happy investing!

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.