Aggressive Hybrid Funds vs. Pure Equity Funds: Which you should consider in a Volatile Indian Market?

As per SEBI regulations, an aggressive hybrid fund is an “open-ended” hybrid mutual fund scheme that invests between:

• 65% and 80% of its total assets in equity and equity-related instruments and

• 20% to 35% of its total assets in debt instruments. 
   

The term “aggressive” is used to distinguish this mutual fund scheme’s equity allocation from other equity hybrid schemes. For example, as per SEBI guidelines:

• A conservative hybrid fund invests between 10% to 25% in equity and equity-related instruments and

• A balanced hybrid fund maintains an equity exposure of about 40% to 60%.
   

In comparison, aggressive hybrid funds carry a much higher equity allocation of 65% to 80%. Due to this higher exposure to equities, aggressive hybrid funds are considered riskier than both “conservative” and “balanced” schemes. 

The higher equity component increases sensitivity to market movements, which can lead to higher fluctuations in potential returns. 

SEBI has classified pure equity mutual fund schemes into 13 distinct categories based on their:

• Investment strategy

• Market-cap exposure, and

• Portfolio construction

Each category has specific minimum allocation norms for equity and equity-related instruments. For more clarity, let’s check out the classification: 

In volatile markets, both aggressive hybrid funds and pure equity funds behave differently due to their distinct risk profiles., an aggressive fund invests between:

• 65–80% in equity and 

• 20-35% in debt

Now, this mandatory debt portion may potentially limit the extent of portfolio drawdowns during volatile conditions. As per general market understanding, debt instruments [such as government securities and high-credit-rated bonds (say AAA or AA bonds)] show lower price fluctuations compared to equities. 

As a result, during periods of market volatility, when equity prices fall sharply due to uncertainty or risk-off sentiment, the debt segment may:

• Remain relatively steady or

• Potentially decline less

In addition, debt holdings may  also generate regular interest income, which may partially offset equity-related losses in volatile market phases. 

As per SEBI guidelines, equity mutual fund schemes are required to maintain a minimum exposure of 65% in equity and equity-related instruments (with the threshold going up to 80% depending on the fund type).

The major distinction from aggressive hybrid funds? SEBI does not require pure equity funds to maintain any mandatory allocation to debt instruments. As a result, pure equity funds could remain fully exposed to equity market movements without any debt component. 

This absence of a debt buffer can increase the impact of market volatility on a pure equity fund. During market downturns, these funds can experience sharper declines in NAV (Net Asset Value) and drawdowns compared to aggressive hybrid funds. 

So now you know what market volatility is, what aggressive hybrid funds and equity mutual funds are, and which may potentially work better during volatile times. If we revise, market volatility represents sharp fluctuations in stock prices over a period.

A high volatility phase usually indicates increased market uncertainty and weak investor sentiment, while lower volatility signals relative stability.

Due to the absence of any mandatory debt investments in pure equity funds, such schemes are usually riskier than aggressive hybrid options (which invest at least 20–35% in debt instruments). As per general understanding, pure equity funds may experience sharper NAV declines during volatile market phases compared to aggressive hybrid funds.

The “right” choice? It depends on your risk appetite and investment objectives. If you are a moderate to high risk investor, aggressive hybrid funds may be more suitable due to the presence of a “debt cushion”. Whereas, if you have a very high risk appetite and are comfortable with short-term price fluctuations, pure equity funds may be potentially appropriate.

1. Does volatility always mean “losses”? 

No, volatility only refers to the degree of price movement in a financial asset or market over a period of time. These movements can occur in both directions! Prices may rise or fall depending on:

• Market conditions

• News flow

• Economic data, and

• Investor sentiment

During positive market sentiment, volatility can potentially drive prices upward. In contrast, during uncertainty or negative news, the same volatility can lead to sharp corrections.

2. Should I stop my SIP investments when markets become highly volatile?

In the SIP (Systematic Investment Plan) mode of investing, you invest a pre-determined amount “gradually”, regardless of market conditions. This allows you to potentially benefit from “rupee cost averaging”, which can average out your purchase cost over time.

Furthermore, trying to time the market and finding “exact bottoms” is difficult in practice. By continuing SIPs during volatility, you can stay invested in the market cycle and benefit from long-term compounding instead of reacting to short-term fluctuations.

3. Which is riskier during volatility: aggressive hybrid funds or pure equity funds?

Aggressive hybrid funds are relatively less risky because they invest 20–35% in debt. Pure equity funds have no mandatory debt portion, so they can experience relatively sharper declines during periods of high market volatility and economic slowdowns.