In the current volatile market conditions, experts have already provided guidance on managing your investment portfolio. We look at another aspect today: which categories of funds are receiving inflows. As they say, the proof of the pudding is in the eating. It is not necessary that what most people are doing is right. We will look at the flow trends and discuss what is advisable.
Equity mutual fund categories
Equity is the favoured category, with the most consistent flows. In February 2026, inflows to equity funds were approximately ₹26,000 crore, lower than ₹33,400 crore in August 2025 and higher than ₹24,000 crore in January 2026. Within equity, the category getting the highest flows, as a trend, is flexi-cap funds. In February 2026, inflows to flexi-cap funds were approximately ₹7,000 crore out of the ₹26,000 crore mentioned earlier. Flexi-cap is the category where there is no regulatory mandate on the market-cap-wise distribution of stocks in the portfolio; it is the fund manager's discretion.
This flexibility gives investors a free hand and lets them leverage their chosen manager's skills. This is a positive trend, as investors are preferring not to bind the fund manager to market-cap boundaries or to avoid sector- or theme-specific funds that carry higher risk.
The category that is consistently losing corpus is the equity-linked savings scheme (ELSS) funds. The rationale here is different. The appeal of ELSS was the tax savings under Section 80C. Now that most income tax payers, say 70% to 80%, have shifted to the new tax regime, ELSS funds are seeing redemption as the three-year lock-in period opens up.
Hybrid mutual fund categories
It has been proven that in times of volatility, such as the current period, a multi-asset strategy performs best on a risk-adjusted basis. Different asset classes, such as equity, debt, and gold, exhibit negative or low correlation. When one asset is beaten down, another one provides stability to the portfolio. While you can always allocate yourself through pure-play equity, debt, and gold funds, multi-asset funds have an advantage: tax efficiency. A mutual fund, being a tax-free entity, does not pay taxes on capital gains. Unit-holders, i.e., investors, must pay tax at the applicable rates.
In hybrid mutual funds, multi-asset allocation funds (MAFs) are receiving the highest allocation, as a trend. This shows the maturity of investors. In February 2026, inflows to the hybrid category were approximately ₹12,00 crore, of which ₹8,500 crore were in MAFs. In January 2026, inflows to hybrid were ₹17,300 crore, of which ₹10,500 crore were into MAFs. Two other hybrid fund categories receiving relatively lower flows but that investors should consider are balanced advantage funds (BAFs) and arbitrage funds.
In BAFs, fund managers take a short position in the futures segment to offset a portion of the portfolio's equity exposure. Consequently, the net effective equity exposure is that much lower. This makes the fund defensive against market volatility. When valuations are attractive, the fund manager would increase the effective equity exposure. Again, this is tax-efficient as the mutual fund, per se, does not pay tax.
In arbitrage funds, there is an apparent equity exposure 65% or more of the portfolio. The entire equity is hedged by taking a short position in the futures segment of the equity segment. Returns do not depend on equity prices moving up; they come from the price differential between the cash/spot segment and the futures segment. Going forward, returns from arbitrage funds would be impacted, as the budget presented on 1 February increases tax on equity derivatives. Still, Arbitrage funds are taxable as equity funds and relatively tax-efficient for investors.
Specialized investment funds
The relatively recent product category, SIF, is gradually gaining traction. AUM as of February 2026 is just under ₹10,000 crore, out of which ₹3,000 crore came in February 2026 itself. Most of the flows are coming from hybrid investment strategies, particularly hybrid long-short strategies. This is a positive sign, as the mass affluent segment is exploring a new investment idea that is more defensive than equity funds but offers decent upside.
Conclusion
Investors have shown maturity by channelizing the majority of flows into MAFs and flexi-cap funds. A sign of maturity is also shown by the fact that equity flows are coming in, even when the market is beaten down. You have to take a call based on your profile, preferences, and investment horizon.
Joydeep Sen is a corporate trainer (financial markets) and author.