As the global backdrop remains unclear, with trade policy uncertainty and tariff hikes weighing on capital expenditure decisions, hybrid funds offer the best risk-adjusted returns to investors, said Franklin Templeton India Mutual Fund in a note. The fund house cautions that elevated levels of fresh equity supply could dampen near-term equity returns.

“While large-cap valuations now appear attractive, mid- and small-cap segments remain above their long-term averages, reinforcing the importance of diversification across market capitalisations and sectors," it said.

“Franklin Templeton recommends that investors consider hybrid funds, which may offer superior risk-adjusted returns in a consolidating or uncertain market phase,” it said.

The advisory comes as Indian equity markets witnessed volatility due to geopolitical tensions, muted corporate earnings, global economic uncertainty in the backdrop of U.S. tariffs.

Indian equity markets to enter a consolidation phase

Franklin Templeton India MF forecasts that Indian equity markets are likely to enter a consolidation phase rather than continue their recent momentum-driven trend, citing global uncertainties and sustained supply of new equity issuances as potential drags on market performance in FY26.

"The global backdrop remains unclear, with trade policy uncertainty and tariff hikes weighing on capital expenditure decisions," said R. Janakiraman, CIO–Franklin Equity India. "This environment has prompted many companies to delay private capex decisions in search of more policy clarity."

However, the fund house believes that India’s domestic growth outlook remains resilient, despite global headwinds. This was attributed to a corrected real effective exchange rate for the rupee; soft oil prices; reducing the current account deficit; healthy corporate balance sheets; and the RBI’s pro-growth stance and ample liquidity.

"These macro tailwinds particularly benefit banks and NBFCs, improving credit flow and overall economic momentum," Janakiraman added.

Franklin Templeton expects muted Q4FY25 earnings, with mid-single-digit growth, but maintains a 13% consensus earnings growth forecast for FY26—while cautioning that the market remains sensitive to potential earnings downgrades.

On the fixed income side, the fund house sees favorable opportunities at the short and intermediate end of the yield curve, citing softening global commodity prices, China’s manufacturing weakness, and policy risks such as stagflation in the US and rate hikes in Japan.

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