Image Source: Business Standard
Key Highlights
• Surge in new fund of funds launches focusing on hybrid mutual funds and diversified equity portfolios
• Hybrid mutual funds blend equity and debt assets, balancing growth potential with stability amidst market volatility
• SEBI’s updated norms and market conditions favor these hybrid fund strategies for a wide risk spectrum of investors
• Hybrid fund assets grew steadily in early 2025, reaching over ₹9 lakh crore, signaling strong investor confidence
• Aggressive, balanced, and dynamic asset allocation hybrids top choices for capitalizing on market opportunities
• Regulatory enhancements promote transparency, disciplined portfolio management, and risk control
• Increasing preference for diversified equity exposure within fund of funds to tap growth while mitigating risks
Evolving Popularity of Fund of Funds in Hybrid and Diversified Equity Space
The ongoing investment trend in 2025 reveals a marked movement towards launching fund of funds (FoFs) that target hybrid mutual funds and diversified equity schemes. These FoFs are designed to combine the strengths of multiple underlying funds — blending equity and debt in hybrid funds or providing wide-ranging equity exposure through diversified equity funds. Investors increasingly seek these vehicles for their ability to reduce risk through diversification while offering attractive return potential.
At the heart of this surge are hybrid mutual funds, which strategically invest across multiple asset classes such as stocks, bonds, and sometimes other instruments like gold. The dual-asset nature of hybrids helps balance the volatility typical in equity markets with the more stable returns of debt instruments. This makes them appealing to a broad spectrum of investors — from conservative to aggressive — seeking steadier long-term wealth creation without overly exposing their portfolios to market shocks.
Market Snapshot: Growth and Classifications of Hybrid Funds
In the first half of 2025, assets under management in hybrid funds have grown to approximately ₹9.15 lakh crore from previous years, showing investors’ preference for balanced risk-return profiles.
SEBI distinctly classifies hybrid funds into multiple subcategories:
• Conservative Hybrid Funds: Lower equity allocation (10–25%) focused on capital preservation with high debt exposure
• Balanced Hybrid Funds: Equity and debt exposure balanced roughly between 40% and 60% each
• Aggressive Hybrid Funds: Higher equity proportion (65–80%) geared towards growth with moderate risk
• Dynamic Asset Allocation Funds: Flexible equity and debt mix adjusted dynamically based on market conditions
• Multi-Asset Allocation Funds: Investment across three or more asset types for broader diversification
These categories provide a tailored range for investors based on risk appetite and investment goals, forming the preferred underlying funds within fund of funds structures.
Regulatory and Market Factors Supporting the Launches
Strong regulatory oversight and reform by SEBI in 2025 bolster the growing FoF market targeting hybrids and diversified equities. New rules mandate prompt portfolio rebalancing to maintain asset allocation within prescribed limits, reducing portfolio drift and risk. Enhanced disclosure requirements increase transparency for investors, building greater trust and aiding informed decision-making.
Additionally, SEBI’s guidelines on derivatives for these funds help lower speculation and enforce alignment with actual market liquidity. This regulatory clarity supports FoFs that hedge or arbitrage using derivatives within hybrid funds, improving portfolio safety.
Diversified Equity Orientation Within Fund of Funds
Besides hybrids, FoFs are increasingly selecting diversified equity funds as underlying investments. These funds spread investments across sectors and market caps within equities, balancing the strong upside potential of equity markets with reduced sector or stock-specific risk. Investors can benefit from professional management and broad market exposure without direct stock-picking.
Advantages of Fund of Funds in this Space
• Professional diversification across multiple funds helps smooth volatility
• Access to a wider variety of asset classes and strategies through a single investment product
• Dynamic allocation and rebalancing help respond to changing market environments
• Suitable for novice to experienced investors looking for balanced and flexible growth options
• Tax efficiency and risk mitigation through layered portfolio construction
Looking Ahead: A Growing Investment Avenue
The launch spree of FoFs targeting hybrid and diversified equity sectors signals smart investor preference for balanced growth amid continued market uncertainty and volatility in 2025. With investor demand robust and regulatory support strengthening, this segment is poised for sustained expansion, making hybrid and diversified equity fund of funds a cornerstone for both wealth preservation and generation strategies.
Source Names: StockGro, Groww, ET Money, Economic Times
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