Balanced advantage and multi-asset funds gain traction as investors seek stability across cycles

Category-level return data between 2017 and 2025 highlights the sharp divergence between pure equity funds and hybrid strategies. While small-cap funds delivered gains exceeding 50% in strong years and steep double-digit declines in weak phases, Dynamic Asset Allocation Funds (DAAF) and Multi-Asset Allocation Funds (MAAF) recorded comparatively narrower return ranges. Over the period, mid- and small-cap categories posted higher long-term compounded returns than hybrid funds, but with significantly higher interim volatility.

The contrast is evident when annual outcomes are viewed sequentially. Small-cap funds surged in one year, declined sharply the next, and oscillated again in subsequent periods. Mid-cap and flexi-cap categories also demonstrated pronounced swings. In comparison, Dynamic Asset Allocation and Multi-Asset categories generally delivered moderate positive returns even in weaker market years, while participating meaningfully in strong equity phases. This relative stability has strengthened their positioning among investors seeking consistency rather than peak performance.

Multi-Asset Allocation funds are mandated to invest at least 10% each in three asset classes, typically equity, debt and gold. This structure enables built-in diversification. As Jeni Shukla, CEO, ValU Wealth Care, explained, “On the other hand, Multi Asset Allocation Funds (MAAFs) have a mandate to invest at least 10% each in at least three asset classes. Usually the three asset classes are equity, debt and gold.” She added that a well-managed multi-asset allocation fund can serve as an ‘all weather’ strategy by reducing overall volatility and eliminating the need for investors to rebalance portfolios themselves, while also offering tax-efficient diversification in many cases.

Dynamic Asset Allocation or Balanced Advantage Funds operate differently. They actively shift allocations between equity and debt based on valuation and market indicators. Shukla noted, “A dynamic asset allocation fund (DAAF) – as the name suggests – dynamically shifts the percentage allocated between equities and debt securities… based on the relative attractiveness of the two asset classes.” She further added that fund managers may vary exposure significantly and often use derivatives to hedge equity risk. However, she cautioned that individual scheme outcomes can vary widely, and investors must evaluate alignment with their risk appetite and time horizon.

From a risk perspective, Vikram Singhvee, Co-Founder at Venn Wealth, underscored the trade-offs. “Dynamic and multi-asset allocation funds typically maintain a meaningful allocation to non-equity assets. As a result, during strong equity bull markets, they can underperform pure equity funds.” He further added that performance depends on timely asset allocation decisions and on historical correlations between asset classes holding true, factors that can lead to periods of underperformance. Singhvee noted that while dynamic strategies may lag during sharp bull runs, they tend to be more effective during consolidation or bearish phases, and over longer periods investors can reasonably expect moderate annualised returns. He also highlighted tax efficiency, stating that rebalancing within the fund does not trigger a tax event, unlike direct reallocation by individual investors, although premature exits may reduce post-tax outcomes.

Market environment plays a decisive role in outcomes. Shukla observed that these strategies can disappoint in years when both equity and debt markets underperform simultaneously. However, she pointed out that subsequent broad-based recoveries across asset classes have historically improved hybrid fund performance. She added that falling interest rates, easing inflation and strong equity markets tend to support returns for both DAAFs and MAAFs, while commodity upcycles may create favourable conditions particularly for multi-asset strategies.

Behavioural considerations also influence adoption. Salma Sony, SEBI Registered Investment Advisor, said, “The most common challenge is the fear of losses during market downturns. Market volatility often triggers emotional responses, leading investors to question their long-term strategy even when their financial plan remains sound.” She further noted that during sharp corrections some investors are tempted to stop systematic investment plans or redeem equity holdings despite no immediate liquidity need. In her practice, she follows a goal-based approach, gradually de-risking portfolios several years before goal timelines to minimise reactive decisions. She

emphasised that smoother return patterns can support discipline, but sustained outcomes ultimately depend on consistent investing aligned with clearly defined financial goals.

Harish Menon, Co-Founder of House of Alpha, interpreted the narrower return range of hybrids as structural rather than incidental. “Hybrid funds are structurally designed to moderate volatility by allocating a portion of the portfolio to fixed income instruments alongside equities. This blended approach naturally results in a narrower return range compared to pure equity strategies.” He added that small-cap volatility, while potentially rewarding, can test investor confidence and should form only a modest portion of overall allocation. According to Menon, long-term wealth creation is driven more by disciplined asset allocation than by the performance of any single segment, and hybrid funds often serve as a relatively stable anchor within diversified portfolios.

For investors weighing higher long-term CAGR in mid- and small-cap funds against interim volatility, the choice ultimately hinges on risk appetite and time horizon. Equity-heavy portfolios may deliver superior compounding if investors remain invested through cycles. However, for those seeking smoother participation across asset classes without frequent tactical shifts, Balanced Advantage and Multi-Asset Allocation funds provide a structured alternative. In an environment marked by valuation concerns and macro uncertainty, these hybrid strategies are increasingly being positioned as core holdings, with higher-risk exposures layered around them rather than forming the portfolio foundation.