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Summary: Before the next market fall shakes your portfolio, find the funds that manage to help investors ride out crashes with less damage.
Even brave investors know this: a full-blown market crash can test your resolve. It is understandably hard to watch your equity portfolio lose years of gains. And that is why the temptation to sell and step aside is hard to resist.
But seasoned investors also know the cost of doing that. Exiting too early often means missing the recovery, and with it, the wealth that patience could have created.
Hybrid funds are the solution for this as their downside protection makes it easier to stay put through bad market phases. Here’s how.
The category to survive bad weather
Hybrid funds invest in a mix of equity and debt. The equity portion helps generate long-term growth, while the debt portion cushions the portfolio during market declines.
How much protection a hybrid fund offers depends on its equity-debt mix. More debt usually means better downside protection but lower growth potential. More equity means higher returns but less downside cushion.
Even so, hybrid funds have historically declined less than pure-equity funds in market corrections. That makes them useful for investors who want growth but not at the cost of sleepless nights.
The table below shows five hybrid fund categories that have consistently fallen less than the Nifty 500 TRI, a proxy for the broader equity market, during major market falls since 2013, when direct plans came into force.
Hybrid funds ease the pain
| Crash periods | Aggressive Hybrid | Conservative Hybrid | BAF | Equity Savings | MAAF | Nifty 500 TRI |
|---|---|---|---|---|---|---|
| Mar 2015 to Feb 2016 | -14.5 | 0.1 | -9.2 | -2.8 | -5.6 | -20.1 |
| Aug-Oct 2018 | -11 | -3.1 | -6.6 | -4.7 | -6.7 | -15.6 |
| Jan-Mar 2020 | -29 | -9.1 | -21.3 | -16.6 | -22.5 | -38.1 |
| Oct 2021 to June 2022 | -14.8 | -3 | -8.8 | -5.3 | -8.7 | -17.8 |
| Sep 2024 to Feb 2025 | -13.4 | -2.5 | -9.7 | -3.5 | -7.7 | -18.6 |
| Numbers are returns in %. Data from 2013 onwards. Returns for the average direct fund in each category. Each crash was the Nifty 500 TRI’s peak to bottom period. The index bottomed out in Feb 2025 but is yet to fully recover. | ||||||
As the table shows, hybrid funds have meaningfully limited losses compared with the broader market. But the size of their defence has differed due to varying debt-equity splits, which ultimately decides the extent of protection.
The most defensive and aggressive of hybrids
1) Conservative hybrid funds: These are the safest of the lot. They typically hold 10 to 25 per cent in net equity, with the rest largely in debt. That explains why they have seen the smallest falls in past crashes.
2) Equity savings funds: These are also built for conservative investors. They usually maintain 25 to 45 per cent net equity exposure. While they are required to hold at least 65 per cent in gross equity, including the hedged equity portion, it is the net equity exposure that largely drives returns and volatility. These funds are therefore protection-first, not growth-first.
3) Balanced advantage funds: Also called dynamic asset allocation funds, they have the flexibility to move anywhere between 0 and 100 per cent in equity or debt depending on market conditions. They can reduce equity when markets look expensive and raise it when opportunities improve. But this flexibility also means the allocation and outcomes can vary widely from one scheme to another.
4) Multi-asset allocation funds: They hold gold in addition to equity and debt with a minimum 10 per cent allocation to each. Their risk profile is broadly comparable to balanced advantage funds, though the presence of gold can make a difference during phases when gold performs strongly. The recent gold rally, for instance, has helped boost multi-asset fund returns.
5) Aggressive hybrid funds: These sit closest to pure-equity funds. They usually hold 65 to 80 per cent in net equity and 20 to 35 per cent in debt. This gives them the highest return potential within the hybrid family but also makes them the most volatile.
The final test: How often do they lose money?
It is not just that hybrid funds decline less but they also have superior odds of escaping losses altogether when going through a difficult year.
The table below shows that all five hybrid fund categories have had fewer instances of one-year losses than the Nifty 500 TRI since 2014.
- Conservative hybrid funds again come out on top. The average fund delivered one-year losses only 1.3 per cent of the time, the lowest among the group.
- Aggressive hybrid funds were at the other end with losses in over 14 per cent of one-year periods, evidently the most volatile of the lot.
The table also shows the worst one-year decline for each category. Even here, hybrid funds have held up better than the broader market.
Hybrid funds lower the chance of losses
| Fund category | Highest 1-yr return (%) | Lowest 1-yr return (%) | Instances of losses in a year (% of times) | 5-yr returns (%pa) * |
|---|---|---|---|---|
| Aggressive Hybrid | 68.8 | -23.3 | 14.4 | 12.5 |
| Conservative Hybrid | 23.6 | -4.0 | 1.3 | 8.7 |
| BAF (Dynamic Asset Allocation) | 47.1 | -15.5 | 5.7 | 10.7 |
| Equity Savings | 34.5 | -11.2 | 3.8 | 8.7 |
| MAAF | 50.7 | -15.9 | 5.0 | 10.9 |
| Nifty 500 TRI | 100.8 | -33.3 | 16.3 | 14.1 |
| Based on one-year daily rolling returns from January 1, 2014 to May 19, 2026 for the average fund in each category. *Five-year rolling return average | ||||
Which hybrid fund is right for you?
That depends on what you want from the investment.
If you can handle volatility and have a long investment horizon, go with aggressive hybrid funds. They are the most volatile among hybrid funds, but their high equity exposure also gives them better long-term growth potential while still offering some downside cushion.
If you want a more stable option with better tax treatment, equity savings funds are worth considering. Their minimum 65 per cent gross equity allocation allows them to be taxed like equity funds, while their lower net equity exposure helps control volatility.
Balanced advantage funds suit investors in the middle. They are designed for those who do not want excessive equity risk but still reasonable growth.
Multi-asset allocation funds are for those who want gold as an additional diversifier. However, their portfolio mix can vary widely across schemes, so check the actual allocation before investing. This holds true for BAFs as well.
The larger point is that hybrid funds are not meant to shoot the lights out in a bull market. Their real value is seen when markets fall. They make the journey less painful, and for many investors, that is what helps them stay invested long enough to benefit from the eventual recovery.
Let us pick a hybrid fund for you
If you wish to start investing in hybrid funds but are unsure about which scheme to start with, let Value Research Fund Advisor help you. Our analysts study hybrid funds on their risk profile, long-term performance, portfolio behaviour and asset allocation discipline before shortlisting the ones that make it to our recommendation list.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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