The Indian equity market has been experiencing intense volatility. In an uncertain environment marked by geopolitical tensions stemming from the West Asia war and its ramifications for the macroeconomy, depending largely on equities may be imprudent and perilous to your wealth.
A tactical approach needs to be followed, where you need to have exposure to both equity and debt instruments. For this purpose, you have hybrid funds that provide the best of both worlds — capital appreciation from equities and regular income from debt securities.
Hybrid category schemes may also allocate a portion of the residual assets (up to 35% of total assets) to infrastructure (InvITs), Exchange Traded Commodity Derivatives (ETCDs), gold ETFs, and silver ETFs.
That said, it’s important to make the right choice rather than invest arbitrarily or follow the herd.
In this article, let’s understand balanced hybrid funds and balanced advantage funds in detail, and which of the two is worthwhile, considering the current market environment.
Balanced Hybrid Funds
These are open-ended funds investing tactically in equity and debt instruments. They are mandated to invest around 40-60% of the total assets in equity and equity-related instruments, and the balance in debt and money market instruments. No arbitrage is permitted in this fund.
So, there is a fair amount of diversification — almost balanced — between equity and debt judiciously followed. The debt provides stability to the portfolio, cushioning you from the equity market volatility. And when the market environment appears favourable in terms of valuations, volatility and growth prospects, the allocation is slightly tilted (to the maximum limit) towards equities, with the objective of long-term capital appreciation or wealth creation.
What this allocation strategy does is that it optimises risk and return, with timely rebalancing of the portfolio when needed. As an investor, you do not have to worry about the tactical allocation to equity and debt; the fund manager handles that for you.
In a bull market, the equity portfolio provides the returns edge. Conversely, when the equity market falls or is volatile, as it is currently, with active portfolio rebalancing to debt, the fund manager’s focus turns to stability and capital preservation.
All you have to do is select your scheme in the balanced hybrid funds wisely, because not all schemes are worth your hard-earned money.
You need to take effort to pick the right scheme that has not only delivered strong returns but also managed risk effectively and performed well on a risk-adjusted basis.
Balanced Advantage Funds
These funds are also known as dynamic asset allocation funds. They hold the mandate to dynamically balance between equities and debt instruments with no fixed range. In other words, the allocation could swing between equity and debt (up to 100%) depending on the outlook for the respective asset classes, with opportunities and risks assessed.
That said, balanced advantage funds usually maintain 65% exposure to equities (including 10-20% arbitrage positions) to enjoy the favourable tax status of an equity-oriented fund.
To take a call on the asset allocation between equity and debt, a balanced advantage fund considers valuation metrics (PE, PB, dividend yield, etc.), volatility index, momentum indicators, further growth prospects, corporate earnings, current interest rate cycle, the yield gap, geopolitical risk, and macroeconomic environment, among a host of other factors.
If the fund manager perceives the equity market as too expensive or frothy, sees positive momentum waning, and/or sees more volatility ahead due to the geopolitical and macroeconomic environment, he/she may tactically shift a portion to debt and money market instruments. This strategic approach is managed entirely by the fund manager, so you don’t have to worry about it.
As with any mutual fund scheme, the selection on your, the investor’s, part plays a crucial role in determining investment success.
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Which Is Better: Balanced Hybrid Funds or Balanced Advantage Funds?
The balanced hybrid funds, which are much smaller in terms of the number of available schemes, have clocked an average CAGR of 8.5% to 11.5% over the last three years (as of 27 March 2026). Over a five-year period, they have clocked an average CAGR of 7.9% to 11.4%.
In comparison, the balanced advantage funds (which have more schemes) have fared slightly better. Over three years, the CAGR is in the range of 10.8% to 11.2% on average (as of 27 March 2026), while over five years, the category average CAGR is in around 9.2% to 10.9%
Note, these are historical returns and not indicative of future returns.
In the current backdrop of the West Asia war, which is having impact on the Indian economy in terms of oil and gas crisis, high energy prices, supply-chain disruptions of various commodities impacting sectors/industries, business sentiments, weak rupee (owing to outflow of foreign capital), higher trade deficit, and inflation, among a host of other things, a dynamic approach shall prove more beneficial instead of balanced 40-60 asset allocation approach.
The Goldilocks macro scenario that India had before the war has almost vanished. India is likely to report a lower GDP growth. Further, the talks of an anticipated recession in the major economies of the world due to the protracted West Asia war are now weighing on the sentiments. One cannot expect stupendous returns from equities during such times, as the equity market may become quite volatile in the near future.
The 10-year G-sec yield has also spiked to around 6.94% — the biggest spike in four years, when the central bank began its rate-hike cycle.
The balanced advantage fund can help reduce your overall risk exposure with an integral dynamic investment mandate. The debt portion can help cushion downside risk in the event equities fall further or in case of a recession. But keep in mind that investing in a balanced advantage fund, even if it hypothetically allocates 100% to debt instruments, is not risk-free. In the case of debt instruments, the risk stems from where interest rates and bond yields are headed, the quality of the instruments held in the portfolio, etc.
The returns you make shall hinge on how astutely the fund manager of a balanced advantage fund has allocated between equity and debt, as well as on the strategy followed when investing in these asset classes. In the past, certain balanced advantage funds have managed downside risk better during bear markets.
That said, an erroneous approach can impact future outcomes. The returns are not guaranteed with any type of mutual fund scheme, for that matter.
You need to have an investment horizon of around three to five years when investing in balanced advantage funds, and a moderate-to-high risk appetite.
In volatile market conditions, taking the SIP route and/or staggered lump-sum investments may be considered, rather than investing a large chunk of your investible surplus at once. This shall help mitigate volatility through rupee-cost averaging while staying focused on investing with discipline for the long term.
In the current times, apart from investing in balanced advantage funds, also consider having around 10% exposure to gold from an asset allocation standpoint. It would potentially prove to be a safe and a store of value in times of geopolitical and economic uncertainty.
Be thoughtful in your approach.
Happy investing!
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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