Hybrid Funds: A smart counterweight in volatile markets?

Economic Times

3 days ago

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But Tariffs Are Only Part of the Picture
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Why People Are Paying More Attention to Hybrid Mutual Funds
Not Immune, But Able to Take in Crises
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Volatility Is No Longer an Outlier; It's Built In
Not a "Safe Haven," But a Market Buffer
Conclusion
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com .)
Since October 2024, the Indian stock market has been very volatile, with corrections, global disruptions, and a growing gap between fundamentals and valuations.As of February 2025, benchmark indices like the Sensex and Nifty 50 are down 10–11% from their highs, which means they have lost most of the gains they made in the last three months of 2024. The mid-cap and small-cap segments have dropped even more, down 15% from recent highs. This shows how quickly sentiment has changed in less liquid parts of the market.The main cause isn't just in the US. Donald Trump, the President of the United States, is pushing for tariffs again. For example, he wants a 25% import duty on Canada and Mexico and 10% on China. This has caused a ripple effect. India's volatility index (VIX) shot up right after he won the election, showing how changes in policy from outside the country can still cause instability inside the country.At the same time, China has released DeepSeek, an AI model that could change the way the world talks about technology. At the same time, tensions between countries are rising, manufacturing data is still slow, and corporate profits have dropped since the second quarter of FY25. Concerns about rising prices and inflation linked to climate change and raw materials prices make the market even more complicated and uneasy.FIIs Leaving, Domestic Flows Staying Strong Up January 2025 saw a sharp ₹78,000 crore sell-off by foreign institutional investors (FIIs), which made the pressure even worse. Some of the selling has been taken up by domestic investors, but the imbalance is clear, especially in the broader market, where liquidity is lower and stories change quickly.Retail portfolios, especially those that are heavily invested in aggressive equity mutual funds, have been hit hard. The values of all stocks have gone down, and the drop in mid- and small-cap stocks has been much worse than what the headline indices show.People are looking at hybrid mutual funds, which mix stocks and bonds, in a different way in this market. Not because they are "safe" or "conservative," but because they show that you can adapt to a market that is changing quickly. Hybrid funds have been around for a while. People are no longer seeing them as a fallback, but as a way to stay invested without being fully exposed to one direction of the market.Hybrid funds can lean more towards growth or stability, depending on the type:Aggressive hybrid funds, which invest 65–80% of their money in stocks, let capital grow but also take some of the shocks that pure equity funds can't avoid.Multi-asset allocation funds, which invest in gold or other asset classes, do well when stocks are under stress because they don't move in the same direction.Conservative hybrids, on the other hand, focus on debt and only have a small amount of equity exposure. This is useful when stability is more important.In bear markets of the past, hybrid funds have had drawdowns, but they've handled them better.For example, during the COVID-led sell-off in early 2020, aggressive and multi-asset hybrid funds fell less than pure equity funds. The reason is that assets are automatically rebalanced and spread out. When stocks fall, the debt part (and sometimes gold) helps make up for some of the loss.That same mechanism is still important today, when news can cause intraday swings and headlines from outside the market can change the ratings of whole sectors overnight.Not only are markets more volatile since 2024, but that volatility has also become a part of the structure. Supply chains, energy prices, and geopolitical alignments are all changing, which means that risk is no longer a one-time thing; it's built into the market.It's easy to see why a product that changes its asset mix on the fly would be appealing in this situation, both in terms of returns and risk management. Especially when investors don't want to be completely wrong or completely right anymore.It's important to know that hybrid funds can still lose money. They still have market risk, especially the ones that invest a lot in stocks. But what they do give you is time and space: time to move things around and space to deal with corrections without losing all your money.Their importance doesn't grow in bull markets; it grows in transitions, which is where we are right now.People are paying more attention to hybrid mutual funds again, but it's not because they want to make money or avoid risk. It's about realising that the market has changed permanently, not just for a short time.As things get more volatile and correlations break down, asset allocation itself becomes the product. In that sense, hybrid funds aren't a compromise; they're a sign of how hard it is for investors to navigate the market right now.(The author of the article is Chakravarthy V, Cofounder & Executive Director, Prime Wealth Finserv Pvt Ltd.)