Prime Review: Should you invest in a Hybrid Index Fund?

Edelweiss recently made headlines when it announced the launch of a hybrid index fund. Soon after, Zerodha also announced its hybrid index fund. Both funds track the same index: Nifty LargeMidcap 250 Plus 8–13 Yr G-Sec 70:30. Index funds so far have been pure equity or pure debt. The index also is an interesting choice, given that most hybrid active funds benchmark themselves to the Nifty Hybrid Composite index series.

So is this a good index to be including in your portfolio? How has it fared in the past? And how does it compare with other hybrid funds? Let’s investigate.

The Index

The Nifty LargeMidcap 250 Plus 8–13 Yr G-Sec 70:30 index was launched in February 2026; however, it has a base date of January 3, 2011 and index data is available from the base date. The index allocates 70% to the equity index Nifty LargeMidcap 250 and 30% to the debt index Nifty 8–13 Yr G-Sec. The index is rebalanced monthly to maintain the 70:30 equity–debt allocation.

On the equity side, the Nifty LargeMidcap 250 itself allocates 50% each to the Nifty 100 (large-cap index) and the Nifty Midcap 150 (mid-cap index). This large-cap to mid-cap allocation is rebalanced quarterly.

On the debt side, the Nifty 8–13 Yr G-Sec index consists of central government bonds with maturities between 8 and 13 years, which are among the most liquid bonds in India. The constituents of this index are reviewed monthly. Existing bonds may be removed as their liquidity declines or as their maturity falls below 8 years. New bonds are added as they enter the 8–13 year maturity bucket and meet liquidity criteria.

The blend of this index is interesting for two reasons. One, on the equity side – it provides exposure across large and midcaps, offering better long-term return potential. The Nifty 50 Hybrid index series, which is the typical benchmark for hybrid funds, is restricted to the Nifty 50 only. Two, on the debt side – limiting to government bonds removes credit risks and improves tracking error. Hybrid indices otherwise hold corporate bonds, where liquidity makes it harder to adequately replicate. The maturity bucket of the gilt exposure is also medium-term in nature that can deliver over longer holding periods.

Index Allocation positioning

From an asset allocation perspective, this hybrid fund fits within the aggressive hybrid category, which is mandated to invest 65% to 80% in equities, with the remainder in debt. With a 70% equity allocation, the Nifty LargeMidcap 250 Plus 8–13 Yr G-Sec 70:30 index sits toward the lower end of this range; however, this is in line with the category. Among the 29 funds in the category, 20 had an equity allocation of 70% or more, while 9 had less than 70% over the past year. The average equity allocation for the category stands at 72.2%.

But breaking it down further, the index is positioned at a higher risk level compared to the aggressive hybrid category.

More mid-caps on the equity: Within the equity allocation, the index appears more aggressive than the category. Since the index’s equity portion is invested in the Nifty LargeMidcap 250, only half of the equity exposure is in relatively stable large caps while the remaining is in midcaps. This makes it different from aggressive hybrid funds where only a few hybrid funds move down the market-cap curve, preferring to stick to large-caps. 

For example, over the past year, aggressive hybrid funds had 68.5% of their equity allocation in large caps, with mid- and small-cap allocations at 17% and 14.5%, respectively. And even where funds have higher mid-and-smallcap exposure – such as Navi Aggressive Hybrid, JM Aggressive Hybrid, LIC MF Aggressive Hybrid, Bank of India Mid & Small Cap Equity & Debt – consistency in performance is poor.

Interest rate risk in debt: On the debt side, the index carries no credit risk as it invests only in government bonds. As mentioned above, sticking to liquid gilts makes it easier for the index fund to replicate the debt portion. However, the index has higher interest rate risk compared to the debt portfolios of aggressive hybrid funds. This is both due to gilts being more volatile than corporate bonds and based on the maturity of the gilt exposure.

Aggressive hybrid funds generally tend to stick to high-rated corporate debt and follow an accrual strategy. A few funds may take duration calls based on rate movements – but in most times, funds do not actively shift around the debt exposure and use it instead as a steady accrual base to absorb equity volatility.

The Nifty 8–13 Yr G-Sec index maintains an average maturity of about 10 years, while the average maturity of the debt portion in aggressive hybrid funds has been around 6.4 years over the past year. The higher maturity makes the debt portion more sensitive to interest rate movements.

Performance

Since this is an index, there is data available to assess performance. Therefore, we analysed 1-year, 3-year, and 5-year rolling returns of the index over the past 7 years. We compared these against the aggressive hybrid fund category average and the Nifty 50 Hybrid Composite Debt 65-35 index (this index is the usual benchmark for hybrid funds and combines the Nifty 50 index and the Nifty Composite Debt index in a 65-35 ratio). The results are as follows:

The Nifty LargeMidcap 250 Plus 8–13 Yr G-Sec 70:30 index has outperformed the aggressive hybrid category average across all return periods. The average return of the index was up to 0.78% higher than the category for 5-year rolling returns. More noteworthy are the standard deviation readings. Given its higher exposure to mid caps and greater interest rate risk, one would expect higher volatility. However, this is not reflected in the data. Across all three time frames, the index posted lower volatility than the aggressive hybrid category average.

Looking at consistency in outperformance, the index again fares better than the category. Its outperformance increases from a modest 53% for 1-year rolling returns to a strong 85% for 5-year rolling returns.

However, a deeper comparison with individual aggressive hybrid funds shows that the index is not a complete outright winner: Out of 20 funds with a 7-year history of 3-year returns, the index outperformed 65% of the funds. The 3-year average returns ranged from 10.8% to 19.57%, versus the index’s 14.32%. 

The index’s outperformance against the category becomes a bit more pronounced over longer time periods. Of 18 funds with a 7-year history of 5-year returns, the index outperformed 78% of the funds. The 5-year average returns ranged from 10.18% to 18.51%, compared to the index’s 13.88%. 

However, the return distribution suggests that the index’s performance is in the bottom half of the return range across time periods, despite beating the category average. This is because a larger number of underperforming funds drag down the category average, masking the strong performance of a few top funds that maintain a clear lead over the index. The more consistent performers in the category – such as ICICI Pru Equity & Debt, Canara Robeco Aggressive Hybrid, or Kotak Aggressive Hybrid – have done better than the index on both returns and volatility. 

Should you invest?

Unlike equity funds, where passive options are available across most categories, the hybrid category has largely remained an active fund stronghold. The introduction of index funds based on the Nifty LargeMidcap 250 Plus 8–13 Yr G-Sec 70:30 index brings meaningful passive competition to aggressive hybrid funds.

An important point to note is that the analysis above is based on the index’s returns. The actual performance of the index funds will depend on its expense ratio and its tracking error. Even a small lag of a few basis points could bring returns closer to the category average.

Therefore, if you are interested in including either the Zerodha or Edelweiss index funds in your portfolio, note the following:

• In general, this hybrid index fund would suit those looking towards a lower-risk route to equity participation than a pure equity fund and with a minimum horizon of 3-5 years. New investors or those with smaller investment size, where asset allocation and tracking active fund performance would be difficult, could use this as an option. 
• However, if you have shortlisted the aggressive hybrid category for your portfolio, and you are comfortable with periodic review it would be better to continue with well-performing active funds. This especially holds if your investment horizon is on the shorter side of 3-5 years as going by index data, outperformance picks up compared to aggressive funds only over longer periods. 
• If you would prefer the passive route, start gradually. Build up your investments as tracking error record starts getting established. Given that the index involves a large number of securities and requires frequent rebalancing, it is best to wait for more performance data before stepping up exposure. Higher tracking error would further reduce its attractiveness compared to consistent aggressive hybrid funds.