Over the past year, Indian equity markets have been volatile, ultimately delivering negligible returns. In contrast, other asset classes held up better. Debt provided stability, while gold, silver and parts of international markets outperformed. The lesson is clear: Relying solely on equities can derail portfolio growth and delay financial goals.
Hybrid mutual funds offer a practical solution by blending multiple asset classes to balance growth and stability. The Securities and Exchange Board of India (SEBI) has defined six sub-categories within this space. In this article, we examine each by covering their investment approach, portfolio mix, performance, tax treatment and suitability for different investors.
Aggressive Hybrid Funds
Aggressive Hybrid Funds (AHFs), earlier known as balanced funds, are among the oldest mutual fund categories. They blend equity’s growth potential with debt’s stability. SEBI requires 65-80 per cent in equities, with the rest in fixed income, enabling upside capture with partial cushioning from volatility.
Portfolio: Management styles differ. Some funds keep equity closer to 75-80 per cent (Aditya Birla SL Equity Hybrid ’95, LIC MF Aggressive Hybrid), while others move within the 65-80 per cent band (Edelweiss Aggressive Hybrid, ICICI Pru Equity & Debt). Mid- and small-cap-leaning funds (BOI Mid & Small Cap Equity & Debt, JM Aggressive Hybrid) have delivered higher returns. Debt strategies also vary: Duration calls (Kotak Aggressive Hybrid) versus accrual focus (Navi Aggressive Hybrid). Nippon India, Axis and Franklin India Aggressive Hybrid hold up to 8 per cent in AA-rated papers to lift yields.
Performance: With equity exposure up to 80 per cent, AHFs often mirror diversified equity funds. Over time, top schemes have matched or beaten large-cap peers and benchmarks. Across seven years of five-year rolling returns, Quant Aggressive Hybrid, BOI Mid & Small Cap Equity & Debt and ICICI Pru Equity & Debt clocked 23-24 per cent CAGR, compared with 18 per cent for Nifty 100 TRI and 17 per cent for active large-cap funds.
Taxation: Since equity allocation exceeds 65 per cent, AHFs get equity taxation. Long-term gains (over 12 months) are taxed at 12.5 per cent above ₹1.25 lakh, while short-term gains face 20 per cent.
Suitability: AHFs suit investors with moderate to high risk appetite seeking long-term growth but with lower volatility than pure equity. They also suit first-time investors and those nearing retirement.
Balanced advantage funds
Balanced Advantage Funds (BAFs), or Dynamic Asset Allocation Funds, are the largest hybrid category with assets of about ₹3.05 lakh crore. Their appeal lies in flexibility. Unlike fixed-allocation hybrids, BAFs can swing from fully equity to fully debt based on market conditions, valuations, interest rates and proprietary models. This adaptability helps contain downside in volatile phases.
Portfolio: BAFs usually follow valuation or momentum-based models using metrics such as P/E, P/B or volatility. Equity exposure can fall to 30-40 per cent when valuations look stretched and rise above 70 per cent in undervalued phases. Most funds maintain gross equity above 65 per cent through derivatives and arbitrage, which secures equity taxation while lowering net equity risk. Currently, Motilal Oswal, Bajaj Finserv, Bandhan and Helios BAFs hold over 80 per cent in equity plus arbitrage positions.
Performance: Their standout feature is downside protection. During the Covid crash of 2020, BAFs cushioned drawdowns better than large-cap equity funds and still participated in the rebound. In the present market, the category corrected only 0.8 per cent against the Nifty 100 TRI’s 4 per cent fall. In strong bull runs, however, returns often trail aggressive hybrids or pure equity funds as models cap equity exposure. Over the past seven years, five-year rolling return analysis shows average annualised returns of 12 per cent, ranging from 5.2 to 29 per cent.
Taxation: Most BAFs enjoy equity taxation with over 65 per cent gross equity allocation. However, Unifi and Parag Parikh BAFs, with 35–65 per cent in equities, fall under the ‘non-equity, non-debt’ category—taxed at 12.5 per cent after 24 months and at slab rates for short-term gains.
Suitability: BAFs suit investors wanting smoother equity participation with lower volatility. Outcomes depend on each fund’s model. They work for first-time investors, retirees and long-term savers. A horizon of three years or more is recommended.
Multi Asset Allocation Funds
Multi Asset Allocation Funds (MAAFs) spread investments across several asset classes to balance risk and return. SEBI requires at least three asset classes with a minimum 10 per cent allocation each. They offer diversification in a single product.
Portfolio: There are 31 funds in this space, with exposure spanning unhedged equities, debt, arbitrage, gold, silver, exchange-traded commodity derivatives, overseas equities, and even REITs and InvITs. Strategies vary. Kotak, Sundaram and HDFC Multi Asset Funds keep over 65 per cent in equities, making them equity-oriented. Edelweiss Multi Asset takes a debt-heavy route by eschewing unhedged equity while investing in arbitrage, commodities and fixed income. DSP, Bandhan and Invesco India add overseas equities, while WhiteOak and Mahindra Manulife also allocate to REITs and InvITs.
Performance: Most funds are new, so performance across full market cycles is unclear. Returns differ sharply by allocation mix. In the past year, funds tilted to gold, silver and overseas equities, such as WhiteOak Capital and DSP Multi Asset, delivered up to 14 per cent.
Taxation: Tax depends on allocation. Equity-heavy funds (Kotak, Sundaram, HDFC) enjoy equity taxation. Debt-oriented ones (Edelweiss) are taxed at slab rates. Schemes with equity below 65 per cent but above 35 per cent, like Nippon India and Quant Multi Asset, fall into the ‘non-equity non-debt’ category: gains after 24 months taxed at 12.5 per cent, short-term gains at slab.
Suitability: MAAFs suit investors seeking easy diversification without managing many products. Since allocation styles differ, fund choice should match risk appetite. They suit moderate-risk investors with a five-year horizon, including retirees, first-timers and salaried professionals.
Equity Savings Funds
SEBI requires these funds to hold at least 65 per cent in equity and equity-linked instruments. Typically, allocations fall into 25-30 per cent unhedged equities, 35-45 per cent arbitrage and 25-35 per cent debt. Since equities plus arbitrage exceed 65 per cent, they qualify for equity taxation. This makes them attractive to conservative investors seeking returns above fixed income, without heavy market risk.
Portfolio: Equity exposure of 30-35 per cent is mostly in large-caps. ICICI Pru and UTI Equity Savings follow this approach, while LIC MF and SBI Equity Savings allocate more to mid- and small-caps (up to 17 per cent). Debt portfolios generally keep low-to-moderate duration. Axis and Franklin India actively manage duration, while LIC MF and Union prefer accrual strategies. Arbitrage positions of 30-45 per cent capture near risk-free spreads by pairing cash and futures trades, reducing net equity risk.
Performance: Over the past seven years, five-year rolling return analysis shows average annualised returns of 10 per cent, with a range of 2-16 per cent. Top performers include Sundaram Equity Savings at 12.7 per cent and SBI Equity Savings at 11.5 per cent.
Taxation: Since gross equity exposure exceeds 65 per cent, these funds enjoy equity taxation.
Suitability: These funds suit cautious investors, retirees seeking lower drawdowns and those parking surplus for two to four years with equity tax benefits.
Conservative Hybrid Funds
Conservative Hybrid Funds (CHFs) cater to investors seeking stability with a modest equity kicker. By rule, 75-90 per cent of the portfolio sits in debt and 10-25 per cent in equities, making them debt-oriented hybrids. Debt anchors returns, while limited equity provides a growth edge.
Portfolio: Debt holdings include government securities, corporate bonds and money market instruments. Most funds avoid credit risk by sticking to AAA-rated securities, such as Bandhan and UTI Conservative Hybrids. Others—Nippon India, ICICI Pru, SBI—take selective exposure to AA or lower-rated papers to enhance yield. Equity exposure, capped at one-fourth, usually leans on large-cap, dividend-paying or stable companies to keep volatility low.
Performance: Over seven years, five-year rolling return analysis shows average annualised returns of 9 per cent, with a range of 3.5-13.7 per cent. Top performers have outpaced bank deposits consistently, though with slightly higher risk.
Taxation: Post the 2023 Budget, tax concessions and indexation benefits were withdrawn for funds with equity below 35 per cent. CHFs are now taxed at slab rates, much like bank deposits.
Suitability: Even after the tax changes, CHFs remain relevant for risk-averse investors. They suit retirees, conservative savers, or those with a three- to five-year horizon seeking returns modestly above fixed income, without full equity risk.
Arbitrage Funds
Arbitrage funds are low-risk options within the hybrid space. By regulation, they must hold at least 65 per cent equity exposure. Instead of directional bets, they exploit short-term price gaps between cash (spot) and derivatives (futures) markets. Equity exposure is fully hedged through opposite futures positions, while the rest of the portfolio goes into short-term debt and money market instruments.
Portfolio: Allocations focus on liquid large-cap stocks with active futures and options markets, along with index futures like Nifty and Bank Nifty. The strategy is straightforward: if a stock trades at ₹1,000 in cash and its one-month future at ₹1,005, the fund buys in cash and sells the future. On expiry, both converge, locking in the ₹5 spread (net of costs).
Arbitrage chances widen when futures trade at a premium. This is common in volatile markets, periods of heavy futures buying, or rising rate environments where cost of carry is higher. They shrink in range-bound markets with abundant liquidity. Seasonal opportunities also arise, such as February-April, when PSU dividends and Budget-related flows widen spreads.
Performance: Over the last five years, one-year rolling returns averaged 5.8 per cent, ranging from 1.8 to 8.3 per cent. Kotak Arbitrage and Invesco India Arbitrage were top performers, each at 6.1 per cent.
Taxation: Arbitrage funds enjoy equity taxation since equity exposure exceeds 65 per cent.
Suitability: These funds suit large investors looking to park money for 6-18 months with post-tax returns above deposits or debt funds, while accepting some short-term fluctuations. For low-income bracket investors, appeal is limited by modest tax benefits, higher expenses and yields often comparable to deposits.
Published on October 4, 2025
