However, what matters to the end-user, i.e. the investor, is the returns over the holding period. Today, we assess the performance of certain mutual fund categories in a de-jargonised manner, making it easy for the investor to understand.
Fund categories
We have taken three hybrid fund categories that have equity exposure and will examine their performance in the most recent phase of the market’s decline. The Nifty 50 index peaked on 26 September 2024 – that’s the starting point of the assessment.
To compare the performance of these three categories, we have taken two pure-play equity funds – the comparison will give us the perspective. The three hybrid fund categories are:
· Balanced Advantage Funds: BAFs have long exposure to equity, usually more than 65 percent of the portfolio, which is considered equity for taxation purposes. The remainder of the portfolio is in debt instruments.
However, part of the equity is hedged by taking a short position in the futures segment. This reduces the net effective equity exposure in the fund. The implication is that when the equity market rallies, these funds gain less than pure-play equity funds and when the market tanks, these funds lose less.
· Aggressive Hybrid Funds: These funds have exposure to equity in the range of 65 to 80 percent of the portfolio, with the balance in debt instruments.
The extent of equity exposure in the portfolio gives an idea of the correlation with the equity market vis-à-vis BAFs.
· Equity Savings Funds: These funds have exposure to usual equity, hedged equity and debt instruments. The combination of usual equity and hedged equity is 65 percent or more, which makes its taxable as equity.
The two equity fund categories we have taken for comparison purposes are large cap and small cap.
Performance
To gauge the performance of these funds, data has been taken for the period from 26 September to 28 March 2025.
BAFs, as category average, have given a negative 6.17 percent return for a regular plan on a non-annualized basis.
Aggressive hybrid funds, with a relatively higher exposure to equity than BAFs, have yielded a negative 8.58 percent in this period.
Equity savings funds, with a relatively higher component of equity hedging/debt exposure, have done relatively better, giving a negative 1.24 percent.
Equity large cap funds have yielded a negative 11.33 percent in this period and for small cap funds, the number is a negative 16.06 percent.
What we observed is that when the equity market tanks, pure-play equity funds give commensurate returns, as per the segment of exposure, i.e. large cap or small cap.
Hybrid funds, with various combinations of equity/hedged equity/debt instruments, have done relatively better.
Over the longer term, pure-play equity funds fared better. Equity funds, transient volatility aside, have delivered returns over an adequate holding period.
The past one-year results are mixed as they include the decline of the last six months.
From 1 April 2024 to 28 March 2025, large cap funds delivered 5.84 percent (regular plan), and small cap funds have given 7.76 percent. Over this period, the BAF category yielded 5.75 percent, aggressive hybrid 8.14 percent and equity savings 7.4 percent.
When we look at 10-year returns till 28 March 2025, large cap funds have delivered 11.1 percent annualized. Small cap funds have done even better at 16.05 percent annualized. Aggressive hybrid funds, with relatively lower allocation to equity than pure play, follows with 10.7 percent annualized.
Then comes BAF, which can fine-tune the effective equity exposure as per their reading of the market, having delivered 9.02 percent. The more defensive of these five fund categories, equity savings funds, delivered a relatively modest 7.54 percent.
The simple message from the analysis is that the purpose of pure-play equity funds is to deliver relatively superior returns, subject to volatility. Hybrid funds reduce the impact during market volatility but end up yielding little less over the long term.
There are 11 equity fund categories, apart from passive funds i.e. index funds/ETFs, and six hybrid fund categories. You can pick and choose the appropriate ones as per your risk appetite. You will have to allocate to multiple categories in a ratio that suits you.
Joydeep Sen is a corporate trainer (financial markets) and author.
