Are fund houses confident or nervous about Indian equity?

Summary: Markets have taken a breather. Small-caps are in the red. Retail investors are nervous. Yet, quietly, mutual funds seem to be jacking up their net equity exposure. We checked how India’s top balanced advantage funds have been repositioning this year, and it reveals a lot about where fund managers think the next move will be. In recent years, Indian investors have largely seen the market go only one way: up. Since April 9, 2020, the Indian stock market (represented by Nifty 500 TRI) has grown at a brisk 24.3 per cent annualised rate. For context, that’s a quantum leap from the measly 1.8 per cent seen in the preceding five years. This phenomenal post-Covid has spawned an entire generation of investors who’ve only known the friendly side of Mr Market. Sure, there have been a few hiccups along the way — like the mild correction earlier this year — the ride has been largely smooth. But in 2025, that momentum has slowed, at least relative to the previous years. The market is up just about 6 per cent this year, and small-caps are in the red. For many, this sideways movement of the market feels alien to many investors, prompting questions about the next plan of action. So, we turned to see what mutual fund houses (also known as asset management companies) are thinking. Are fund houses still bullish on Indian equities, or are they quietly tapping the brakes? Reading the market mood through Balanced Advantage Funds There are several ways to gauge fund managers’ sentiment. One barometer is to look at  Balanced Advantage Funds (BAFs), also known as dynamic asset allocation funds. These are hybrid funds that invest in both equity and debt but unlike traditional funds, their mix isn’t fixed. They dynamically adjust allocations depending on market conditions. When markets look frothy, they cut equity and move to debt. When valuations look attractive, they turn contrarian, buying into equities when others are fearful. Fund houses say this dynamic strategy helps them capture upside and cushion downside, making them popular with investors who prefer flexibility over rigidity. In fact, there are two levers that make BAFs stand out: 1. Flexibility: They tweak exposure based on market valuations, interest rates, and macro indicators. When stock valuations run high, they shift towards debt; when markets dip, they return to equities. 2. Hedging: BAFs often hedge a portion of their equity holdings using derivatives. This not only protects against market volatility but also helps them maintain tax-efficient “equity” status. Because balanced advantage funds actively shift between equity and debt depending on how their fund managers view market conditions, their allocation pattern serves as a good indicator of sentiment. When they increase equity exposure, it usually signals confidence in the market’s prospec