Hybrid mutual funds, often positioned as a balanced investment avenue combining equity and debt, have drawn significant attention from investors. Yet, the prevailing market scenario raises an important question among newbies–should the first-time investor begin with hybrid mutual funds?

Market experts suggest the answer is not one-size-fits-all and depends largely on risk appetite, market conditions, and investment goals.

According to Vikas Puri, Senior Partner at Complete Circle Capital, the recent outflows in hybrid funds were largely driven by arbitrage funds—a category typically used by investors for short-term parking during uncertain market phases. Notably, arbitrage funds alone saw outflows of around Rs 21,000 crore during the period, reflecting the unwinding of such short-term positions.

“When markets were highly volatile and there was a risk-off environment, investors preferred arbitrage funds due to their relative tax efficiency. However, as valuations became more reasonable and markets stabilised, money began moving back into equity-oriented funds,” Puri explained.

He added that this shift signals a gradual return of investor confidence, with increased participation seen in mid-cap, small-cap, and flexi-cap funds after a period of caution.

Kshitiz Mahajan, Managing Partner & CEO of Complete Circle Wealth, highlighted that the outflows should not be viewed negatively in isolation. He pointed out that quarter-end dynamics also play a role, particularly due to corporate treasury movements.

“Liquid, ultra-short-term, and arbitrage funds often see redemptions at the end of a quarter as companies adjust their books. At the same time, the nearly 10 per cent correction in the Nifty during the period also impacted hybrid fund valuations due to mark-to-market effects,” Mahajan said.

He added that such corrections—close to 9–10 per cent in the benchmark—also reduce the overall value of hybrid portfolios due to their equity exposure, even if underlying flows remain stable.

Despite these fluctuations, both experts agree that hybrid funds remain a strong category—especially for those investors who are not keen on managing their asset allocation themselves, since such funds allow for automatic rebalancing carried out by fund managers through market conditions or metrics such as price-to-earnings or price-to-book ratios.

Hybrid funds combine equity and debt instruments and, in some cases, include additional asset classes such as gold, commodities, or even international exposure. This diversification allows fund managers to dynamically allocate assets based on market conditions.

• Aggressive hybrid funds (higher equity exposure)
• Balanced advantage or dynamic asset allocation funds
• Conservative hybrid funds (debt-heavy)
• Multi-asset allocation funds (equity, debt, gold, etc.)
• Equity savings funds
• Arbitrage funds

These have all been developed for various types of risk appetite and time periods of investments. A multi-asset fund is one such type that has become popular in recent times, owing to its exposure to gold and other commodity-based assets, which have performed well in uncertain situations.

Mahajan takes a nuanced view. While hybrid funds are often marketed as a safer starting point, he does not always recommend them as the first choice for new investors—especially in the current market environment.

“If a first-time investor is entering during a market correction, it may be more beneficial to build a structured equity portfolio, as valuations are relatively attractive,” he said, implying that newer investors who can take on more risks should consider investing in equities rather than hybrids.

However, he added an important caveat: hybrid funds are suitable for those with low risk appetite or for investors transitioning from traditional instruments like fixed deposits.

“In such cases, multi-asset allocation funds and balanced advantage funds are good entry points. They provide diversification, gold exposure, and automatic rebalancing, which reduces the need for active decision-making,” Mahajan noted.

He also highlighted that for investors with lower risk tolerance, these funds help manage uncertainty by shifting allocations dynamically—reducing equity exposure when markets are expensive and increasing it during corrections.

From a portfolio perspective, hybrid funds can play a stabilising role. Puri emphasised that investment decisions should always be aligned with three key factors: risk appetite, time horizon, and financial goals.

“For short-term or near-term goals, where taking high risk is not feasible, hybrid funds can help balance the portfolio. They offer moderate returns with lower volatility compared to pure equity funds,” he said.

Hybrid funds are particularly useful for investors who want exposure to equity markets but are not comfortable with sharp fluctuations. Moreover, they aid in mitigating the problem of investors who frequently experience buyer’s remorse when it comes to their participation or timing in the market. Hybrid funds, through their risk-return trade-off, mitigate such problems.

They are more appropriate for investors with relatively short-term investment periods, usually less than five years, where purely equity investments could be less favourable given the market fluctuations. When dealing with investment plans lasting three to five years, hybrid investments prove to be more advantageous.

Mahajan also recommends that investors who are unable to actively rebalance their portfolios allocate a portion to hybrid funds.

“In my view, around 15–20 per cent of a portfolio can be allocated to hybrid funds. Ideally, this can be split between a multi-asset fund and a balanced advantage fund,” he said.

He added that such funds not only provide equity exposure but also include gold allocation—typically in the range of 5–7 per cent—and offer downside protection during market corrections.

Both experts strongly cautioned against over-diversification—a common mistake among retail investors, especially beginners.

“There is no need to hold too many funds. A well-constructed portfolio can be managed with five to seven funds across categories,” Puri said.

Mahajan echoed this sentiment, stressing that investments should be simple and easy to track.

“Your entire portfolio should ideally fit on one page. If it becomes too complex, it becomes difficult to manage and defeats the purpose of disciplined investing,” he said, noting that many investors end up holding dozens of funds, which dilutes returns and complicates monitoring.

Hybrid funds may turn out to be a handy tool, especially for conservative investors or for people who want to adopt a balanced portfolio but do not wish to manage their investments.

Ultimately, what will matter more would be whether an investor is willing to take risks or not, how long he plans to stay invested in the market, and how comfortable he is with volatility.