Why Hybrid Investing Makes Sense in Challenging Markets

K Rajesh,
Managing Partner, Growell Capital Distribution LLP

Given the continuing geopolitical tensions in West Asia, with no permanent peace deal in sight, disruptions to the movement of goods across the Strait of Hormuz, AI-related challenges for businesses, and elevated fuel prices, equity markets therefore remain highly volatile.

Debt markets have generally been steady, with occasional G-sec yield rotations, as interest rates remain moderate and inflation has risen mildly, driven largely by food prices. Gold prices have cooled off a bit over the past six months after a multi-year mega bull run. REITs (Real Estate investment trusts) have delivered over the past 12–18 months, riding on office space demand.

For a retail investor, these varying trajectories of different asset classes present challenges in deciding the right investment avenues at any point in time, more so in a dynamic market environment where geopolitics, anxiety around the US Federal Reserve's rate action, spikes in energy prices, increasing inflation, and AI disruptions present challenges even as the domestic macros and corporate earnings revive.

Therefore, hybrid investing, deploying amounts across two or more asset classes, would help in delivering optimal riskadjusted performance. Doing so via the Mutual Fund route is ideal for retail investors.

The rising interest around Hybrid Funds can be gauged from the fact that their assets have increased by a whopping 111.9 per cent over the past three years to Rs 11.68 trillion as of July 2026, according to trade body AMFI's data.

Deep Dive into Hybrid Mutual Funds - Hybrid mutual funds invest in at least two asset classes. These include equities, bonds, and commodities (gold and silver). They are also permitted to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Many of the hybrid categories also use derivatives for hedging or generating additional yields.

Depending on how investments across asset classes are made, there are several hybrid fund categories.
■ Conservative hybrid funds invest 75–90 per cent of the portfolio in highly rated debt instruments and around 10–25 per cent in equities.
■ Balanced hybrid funds invest in both equity and debt, with 40–60 per cent in each asset class, allowing the mix to vary around 50:50.
■ Aggressive hybrid funds invest at least 65–80 per cent of their assets in equities and 20–35 per cent in debt.
■ Balanced advantage or dynamic asset allocation funds invest 0–100 per cent in equities and bonds, based on evolving market conditions.
■ Multi-asset allocation funds invest in at least three asset classes, with a minimum 10 per cent allocation to each.

Specifically, arbitrage funds use derivatives such as cash-futures, covered call, and other strategies. The minimum allocation to equity and equity-related instruments is 65 per cent. Equity Savings Funds mix unhedged equity (typically capped by the AMC between 15 and 40 per cent), arbitrage strategies, and a minimum of 10 per cent in traditional debt instruments.

Choosing the Right Hybrid Category - Depending on an investor's risk appetite and goals, one or more of the above categories can be chosen for investments. A mutual fund distributor or a registered investment advisor may be able to help investors choose the most suitable categories.

For instance, a conservative hybrid fund may suit a low-risk investor, while an aggressive hybrid scheme would be appropriate for an investor willing to digest some level of volatility but who seeks balance with debt. A multi-asset allocation fund can suit many investors as it provides exposure to multiple avenues through a single product.

In all hybrid categories, the fund manager would make the portfolio allocation based on in-house valuation models, macroeconomic factors, and research inputs, and would also take care to rebalance periodically.

As for performance, several hybrid fund categories have delivered inflation-beating returns over the medium to long term, although results vary by category and time period.