5 Types of Equity Mutual Funds to Manage Market Volatility in 2026

The year 2025 saw strength in largecaps even as broader market, particularly smallcaps, saw weakness.

But while large-cap indices touched life-time high during the year, their returns significantly underperformed major global peers such as the US, UK, China, Japan, Russia, and Hong Kong.

This was largely due to valuation concerns, FII outflows, Indian IT companies lagging in the AI race, and tariff concerns, among other factors.

Going ahead, in 2026, the equity markets are expected to be influenced by factors such as the outcome of India-US trade talks, improvement in corporate earnings, FII inflows, reforms to be announced in the Union Budget, agricultural growth, consumption demand, and inflation levels.

Naturally, it's important not be over optimistic in equity yet. There is always a chance that the market will witness high volatility and even corrections, especially if there are negative surprises.

So if market volatility makes you jittery, you may need to reconsider your risk appetite and investment strategy and prefer funds that are less prone to market volatility.

In this editorial, we have listed 5 types of equity mutual funds are relatively less risky and are better-placed to handle market volatility and uncertainties due to their asset allocation and investment mandate.

#1 Aggressive Hybrid Funds

Aggressive Hybrid Funds are hybrid mutual funds that invest predominantly in equities (65-80% of their assets) along with meaningful exposure to debt securities (20-35% of their assets).

This approach provides you with the benefit of the upside potential of equity investment at a lower risk as compared to pure equity funds.

Category Performance - Aggressive Hybrid Funds

Source: ACE MF

The equity part of the aggressive hybrid fund offers you the opportunity to benefit from the long-term growth of equities, while the debt part of the portfolio offers stability and cushion against equity market volatility.

#2 Multi Asset Allocation Funds

Multi Asset Allocation Funds aim to generate capital appreciation by investing in a diversified portfolio of 3 different asset classes.

They usually invest in equity, debt, and gold, investing a minimum of 10% in each.

The low correlation among assets helps reduce the overall risk to the portfolio as not all asset classes move in the same direction always.

Category Performance - Multi Asset Allocation Funds

Source: ACE MF

For example, in 2015, 2016, 2018, and 2022, when equities disappointed investors, other asset classes such as debt and/or gold fared better.

Hence following a tactical multi-asset approach when investing makes sense.

When you tactically invest in multiple asset classes, the impact of any sharp negative movement in one asset class is usually mitigated by the possible rise in other asset classes.

#3 Large Cap Funds

Large Cap Mutual Funds invest in stocks of companies that are usually market leaders and have the better ability to manoeuvre through market phases and tide over volatility.

These companies have well-established brand recall value, economic moats, competitive pricing, ethical and efficient management, governance and compliance practices, solid balance sheet, and surplus cash reserves.

And most importantly, they enjoy customer loyalty that helps them tide over the tough times.

Category Performance - Large Cap Funds

Source: ACE MF

This enables large cap funds to offer stability and witness lower downside risk compared to mid-cap funds and small-cap funds during phases of high market volatility.

Thus, when you invest in large cap mutual funds, you benefit from the steady growth of capital over the long run without exposing your portfolio to high risk.

#4 Flexi Cap Funds

As you may know, market cap performance differs every year; sometimes large-caps outperform, while other times, it could be mid and small-caps.

Hence, diversification across the market cap, viz. large-cap, mid-cap, and small-cap, can help you to lower the impact of volatility on your portfolio and thereby earn better risk-adjusted returns.

Investing in Flexi Cap Mutual Funds is a great way to diversify your portfolio across market caps and thereby maximise portfolio returns over the long run.

Category Performance - Flexi Cap Funds

Source: ACE MF

Flexi cap mutual funds have the flexibility to increase/decrease exposure to a particular segment depending on market conditions, liquidity conditions, and valuations.

This gives fund managers greater scope to identify attractive opportunities from a large universe of stocks, thereby reducing the risk.

#5 Value Funds

Value Funds aim to pick undervalued stocks, i.e., the stocks' whose current market price is lower than their intrinsic/fair value but have strong fundamentals and high-growth potential.

Value funds can offer a better risk-reward potential and act as a great diversifier because they are better positioned to manage the downside risk during a market fall.

They also tend to do well during phases of market recovery.

Category Performance - Value Funds

Source: ACE MF

Although value funds tend to underperform during momentum-driven market rallies, when the market realises the true potential of value stocks, investors are rewarded with attractive gains.

Conclusion

Volatility is the inherent nature of the stock market and equity mutual fund investments.

If you react to every phase of market volatility and redeem your investment, you may end up missing your financial goals.

Therefore, as long as you have made the best and the most suitable investments, it's important that you stick to your investment plan regardless of the ups and downs in the market.

Despite the plethora of volatile events seen in the past, such as the dot-com bubble, sub-prime crisis of 2008, COVID-19 pandemic, etc. the equity market has grown manifold over the years, thereby compounding investors' wealth and rewarding them for their patience.

Thus, ensure that you have an investment horizon of at least 5 years when you invest in equity mutual funds as it helps you ignore the market noise and short-term fluctuations.

#Table Note: Data as of January 06, 2026
The securities quoted are for illustration only and are not recommendatory
Past performance is not an indicator for future returns.
Returns are on rolling CAGR basis and in %. Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.

Disclaimer: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, enlistment as IA with Exchange and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.