Mutual fund 2026: How should I start investing in hybrid mutual funds in 2026, I have an all-equity portfolio right now?

Hybrid mutual funds blend equity and debt in one portfolio, offering the growth potential of stocks with the stability of bonds, a smart choice for medium-term goals (3–5 years). In 2025, they remain attractive for investors seeking a balance between risk and reward amid market uncertainty. How should I approach them? I have an all-equity portfolio right now with a high-risk appetite.

Advice by Anshi Shrivastava, Head – Personal Finance Training at 1 Finance

Firstly, let’s understand Hybrid Mutual Funds, it is a combination of equity and debt in one portfolio, that offers growth potential with some stability. They're particularly popular for 3-5 year goals.

Hybrid funds come in three main varieties, each with a different equity-debt mix managed by the fund manager:

Fund Type	Equity %	Debt %	Typical Investor Profile
Conservative Hybrid	10–25%	75–90%	Very low risk tolerance
Balanced Hybrid	40–60%	40–60%	Moderate risk
Aggressive Hybrid	65–80%	20–35%	High risk

Addressing the critical issue with Hybrid Funds: The Total Expense Ratio (TER) is the annual fee that investors pay to the fund house for managing a mutual fund scheme. While most investors focus only on returns, a quiet but more impactful reality is often ignored: just like investment gains, the TER also compounds over time.

Let’s understand the impact of TER with the table below:

Fund Category	Realistic TER	Range Approx. value of Rs 1 lakh after 10 years	Total fees paid over 10 years (approx.)
Pure Equity Funds	0.5–1.1%	Rs 2.65–2.80 lakh	Rs 15,000–24,000
Hybrid Funds	0.5–2.1%	Rs 2.35–2.85 lakh	Rs 12,000–42,000
Pure Debt Funds	0.2–0.7%	Rs 1.85–2.00 lakh	Rs 6,000–14,000

*Assuming ~11.5–12% gross equity returns & ~7.5% debt return before taxes.

A smarter alternative in this case -- Build Your Own Allocation:

In hybrid funds, investors pay a Total Expense Ratio (TER) that is often equal to (or even higher than) that of pure equity funds, despite a substantial portion of the portfolio being parked in lower-return debt instruments. The fund house charges equity-like fees while delivering diluted returns.

Moreover, hybrid funds impose a generic asset allocation decided by the fund manager to suit everyone. This allocation is blind to the unique realities that truly determine long-term wealth outcomes.

Whereas, an individual's asset allocation is intensely personal. Asset allocation depends on the fragility of an individual’s income stream, their current tax slab, their EPF balance, their life stage, their parents’ medical cover, how many sleepless nights a 40 % drawdown would cost them, the precise year their child needs college fees, their real-estate exposure, and many other situations that may be unique to them.

Here, a proper financial plan would make more sense to decide your ideal asset allocation.

So, instead of going for a single financial product, go for a financial plan.

Can check Financial Tools & Calculators here

Hybrid funds vs equity funds

Aggressive hybrid funds are attracting a growing share of investor money at a time when markets have remained volatile for some time and benchmark indices are struggling to find direction. Hybrid funds, by design, mesh the growth potential of equities with the relative stability of debt, offering investors a smoother ride through market cycles. These funds invest across both asset classes, reducing risk through diversification while still aiming to deliver meaningful long-term returns.

Under SEBI's stipulation, aggressive hybrid funds need to allocate 65-80% to equities and 20-35% to debt, which offers them sufficient equity exposure to rally in rising markets and a cushion during corrections. In reality, the category is now averaging around 72% equity and 21% debt, thereby aiding investors in benefiting from automated asset allocation without having to fine-tune the mix themselves.

This balanced structure has become particularly appealing over the past year, with the Nifty having remained stuck in a prolonged correction marked by sharp swings. Data from AMFI shows the category's asset base has grown 13% year-on-year to Rs 2.5 lakh crore as of October 2025. Investor folios, too, have risen by 4 lakh, reaching 60.44 lakh, reflecting rising confidence in the hybrid approach.

Performance has validated this trend. Aggressive hybrid funds have returned 7% over one year, 16.5% over two years, and over 17% over five years—outperforming the Nifty 50 Hybrid Composite Debt 65:35 Index over two- and five-year periods.

The top performers include the ICICI Prudential Equity & Debt Fund, returning 19.6% CAGR over 2 years and 24.7% over 5 years. This is followed by various Mahindra Manulife, Bandhan, Edelweiss, and Invesco India schemes. Many of these have managed to return 18-20% CAGR over two years and 16.5-19.9% over five years.

With markets still choppy, the middle path—equity-like growth without full equity risk—seems to be increasingly the place to which investors are drawn.