Equity-Debt Hybrid Funds Are Surging: What It Signals for India’s Broader Market Sentiment

Investor interest in hybrid mutual funds surged in May 2025, with net inflows rising sharply to ₹20,765 crore from ₹14,247 crore in April, making a 46% month-over-month jump . Arbitrage funds accounted for the lion’s share, attracting ₹15,701 crore , followed by multi-asset allocation funds at ₹2,926 crore. The trend signals a growing appetite for balanced portfolios that blend equity, debt, and even commodities, such as gold.

Despite a year-on-year dip in total FY25 inflows to ₹1.19 lakh crore (down 18% from FY24), overall participation continues to expand. Hybrid fund folios touched 1.56 crore, while assets under management rose 22% to ₹8.83 lakh crore —suggesting that investors are staying invested, albeit with a more risk-calibrated approach.

Let’s take a closer look at what these flows tell us about broader investor behaviour and market sentiment at this stage of the cycle.

What Does the Surge in Equity-Debt Hybrid Funds Signal?

The surge in equity-debt hybrid funds underscores the following key indicators:

- Market Volatility

In early 2025, the Nifty 50 saw a sharp 17.25% correction from its April highs, driven by global uncertainty, profit booking, and weak Q4 earnings. Foreign Institutional Investors (FIIs) offloaded ₹1,970 crore on July 2, while Domestic Institutional Investors (DIIs) injected ₹2,763 crore, signalling cautious sentiment . This volatility prompted investors to shift toward balanced hybrid funds with a 60:40 equity-to-debt mix.

- Shift in Priority

The ICRA study reveals that equity hybrid funds are now attracting the majority of inflows from Tier-2 and Tier-3 cities. This trend suggests that many new investors outside metro areas prefer a balanced approach to entering the markets, aiming to manage risk rather than directly investing in high-risk assets.

- Taxation Changes

The FY25 tax regime favours equity-oriented hybrid funds (with at least 65% equity allocation), which are taxed like equity schemes at 12.5% on long-term capital gains exceeding ₹1.25 lakh. In contrast, pure debt funds now attract slab-based taxation without indexation benefits . This change has made equity-heavy hybrid funds more attractive from a post-tax return perspective.

- Demographic-Based Shift

According to AMFI-Crisil data, 51% of investors aged 58 years or older prefer hybrid funds . This demographic shift is significant because older investors typically prioritise capital preservation and income stability. The hybrid structure, especially conservative variants, offers a middle ground between fixed deposits and pure equity.

- Uncertainty Around Interest Rates

Since these funds include both equity and debt, they act as a hedge against uncertainty on both sides. If inflation rises, equity allocation can offer inflation-beating returns. If interest rates rise, debt components may suffer, but equity may compensate. This dual exposure suggests that investors are not entirely clear about macroeconomic trends and are preparing for different possibilities. It signals a broader market that is adjusting to unclear economic indicators.

- Value-Centric Allocation

Investors are shifting away from momentum bets, focusing instead on fundamentals and stable earnings. This move, reflected in hybrid funds favouring value-based equities and steady-yield debt, suggests a cautious return outlook amid rising capital costs. The broader tilt indicates that the market is pricing in overvaluation risks and bracing for slower, more grounded growth.

- Liquidity Management

Hybrid funds enable investors to maintain market liquidity while mitigating volatility. By parking money in these instruments, investors maintain exposure to market-linked instruments without the illiquidity of traditional fixed deposits or long-term bonds. This allocation behaviour reveals a preference for keeping funds relatively liquid while waiting for clearer market signals. Traders can interpret this as an indication that investors are not withdrawing from markets but are temporarily hedging until a better entry opportunity arises.

- Increased Institutional Participation

Institutional investors, such as banks, insurance firms, and pension funds, often utilise hybrid funds as part of their liability-matching strategies. Their rising interest in these funds signals a long-term cautious view. Since these entities typically conduct in-depth macro and sectoral analysis before allocating capital, their preference for hybrids suggests a neutral to cautious outlook for both bond and equity markets.

Conclusion

The surge in equity-debt hybrid funds is more than a passing trend; it reflects the evolving mindset of investors in a rapidly changing market. As India navigates through economic cycles, policy shifts, and global macro pressures, hybrid funds are offering a measured, disciplined, and diversified approach to investing.

More than anything else, this shift highlights that Indian investors are maturing. They are no longer chasing unrealistic returns. They are thinking long term. And they are choosing strategies that reflect balance, not bias.

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