Understanding Aggressive Hybrid Funds
By Akhil Chugh
Date October 24, 2021
Hybrid funds work in the grey area between pure equity and pure debt funds. There are many ways to create a hybrid scheme that leverages investment opportunities in both the asset classes i.e., equity and debt. Most hybrid funds vary the percentage of funds allotted to equity to achieve the fund’s objectives.
Here, we will explore the Aggressive Hybrid Funds in detail.
What are Aggressive Hybrid Funds?
Aggressive Hybrid Funds or Equity Oriented Hybrid Funds are hybrid mutual fund schemes with a larger allocation to equity or equity-related securities. Hybrid schemes invest in multiple asset classes, primarily equity and debt. As per SEBI, hybrid aggressive funds must invest at least 65% of their assets in equity or equity-related securities and the rest in debt instruments.
- These are open-ended hybrid schemes.
- They invest at least 65-100% of their total assets in equity & equity related instruments and 0-35% in debt instruments.
- Endeavour to capitalise from the investment opportunities in the equity markets while debt portfolio limits the downside risk.
How Aggressive Hybrid Funds Work?
Aggressive Hybrid funds work on the principle of asset allocation. Different asset classes have different risk profiles. Aggressive hybrid funds invest in two asset classes together- Equity and Debt. By diversifying investments across equity and debt asset classes, these schemes aim to reduce risk and at the same generate returns for investors over sufficiently long investment horizons.
As an asset class, equity has the potential to provide good returns and generate wealth for investors in the long term. On the other hand, debt provides stability to the portfolio. With the combination of equity and debt, the fund essentially tries to offer the best of both the asset classes in a single investment product. The equity portion helps in generating returns when the equity market performs well, and the debt portion of the funds works as a cushion to provide stability in returns when the market is underperforming.
Who should invest in Aggressive Hybrid Funds?
Aggressive Hybrid Funds aims to balance the risk-reward ratio and optimize the returns on the mutual fund investment at reduced risk. It is suitable for the below bucket of investors:
- First-time investors: These funds are suitable for investors who want to start investing in equities, but at the same time don’t want the level of risk that comes with pure equity funds. The debt part ensures that in times of market volatility, the investment value of the portfolio doesn’t fluctuate as much as pure equity funds.
- Investors with longer investment horizons: These funds invest a majority of the invested money in equities; hence, you need to have a moderate to long term horizon for this fund. Ideally, you can invest in these funds for the long-term financial goals with time horizon of at least 5 years to allow the fund to realize its full wealth-creation potential.
- Investors with moderately high-risk appetite.
Benefits of Investing in Aggressive Hybrid Funds
1. Advantage of capital appreciation with low volatility:
Aggressive Hybrid Funds invests at least 65% of its portfolio in equities and the rest in debt instruments. With the combination of equity and debt, the fund essentially tries to offer the best of both worlds in a single investment product. Aggressive Hybrid Fund ensures your investment returns are not solely dependent on equity market movement and at the same time there is a cushion provided as and when markets correct.
2. Balance risk-return mix through active diversification:
The risk and returns in aggressive hybrid funds are balanced through active diversification across asset classes. The risk of equity investments is balanced with debt investments. You might get higher returns with reduced risk.
3. Eliminate the need of buying multiple funds:
Aggressive Hybrid Funds eliminate the need of buying multiple funds for exposure to different asset classes. This also eases the tracking effort required as the fund manager takes care of asset allocation between the two asset classes.
4. Relatively Less Volatility:
Aggressive Hybrid Funds can be slightly less risky when compared to Pure Equity Fund. If the Market falls and equities suffer, the risk in an Aggressive Hybrid fund would be limited to the part invested in Equities. The debt portion will limit the downside risk.
Best Aggressive Hybrid Funds to Invest:
Based on our analysis and research at Net Brokers, below mentioned schemes are currently the best schemes in the Aggressive Hybrid Fund category. These funds fare well on quantitative and qualitative parameters and have the potential to deliver superior growth in the long run.
How Aggressive Hybrid Funds are Taxed?
For taxation purposes, Aggressive funds are treated similar to equity funds with the following tax rules:
- The capital gains earned on the redemption of fund units within 1 year are treated as Short Term Capital Gains (STCG) and will be taxed at 15 percent.
- If you hold your investments for more than a year, the gains earned are classified as Long-Term Capital Gains (LTCG) and the gains up to ₹1 lakh are tax-free. The gains exceeding ₹1 lakh are taxed at 10 percent.
- Dividend gains earned from these funds will be added to an Investor’s income and taxed according to the income tax slab investors falls under. However, if these gains are in excess of ₹5000, TDS is applicable.
Key Takeaways from Net Brokers:
- As these funds invest across both equity and debt securities, it gives investors the benefit of diversification across asset classes.
- Aggressive hybrid funds earn returns majorly from their equity investments as they constitute the majority of the portfolio. The debt part of the portfolio offers stability to the portfolio. Thus, Aggressive Hybrid funds have the potential to deliver growth along with stability in the long term.
- First-time equity investors may consider getting started by investing in a hybrid fund. This gives them a controlled exposure to equities.
- Investors with moderate risk tolerance and an investment horizon of at least 5 years can consider Aggressive Funds.
Investors should carefully scrutinize various Aggressive Hybrid Mutual Fund schemes before making investments based on parameters like risk appetite, expense ratio, fund’s performance etc. Gauge your risk appetite and the time horizon for which you can stay invested to choose the fund that best suits your investment goals.
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