Why Invest in Aggressive Hybrid Funds?
By Akhil Chugh
Date February 27, 2022
One of the key investment mantras for successful investing is ‘Do not keep all your eggs in one basket.’ One should not stay invested in a single asset class and should diversify the portfolio across different asset classes to mitigate the investment risk. Hybrid funds do just that. Hybrid funds invest in both equity and debt instruments offering an ideal blend of asset classes. There is various type of hybrid funds suitable for investors with different risk appetite. In this blog, we will focus on one of such hybrid funds – Aggressive Hybrid Funds, its benefits and taxation.
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 time 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 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.
Why invest 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. It offers proper diversification by selecting high-risk, high-return equities and low-risk, steady income debt funds. It ensures that returns do not solely depend on one asset class, like in pure equity funds. These funds let investors enjoy higher capital appreciation from equity investment while providing a cushion against market volatility through debt investment like money market instruments.
3. Ease:
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.
5. Automatic rebalancing:
Aggressive Hybrid Funds allow rigorous rebalancing within the mandated limits of the funds. So, fund managers will allocate more funds towards equities for higher capital appreciation when the market rises. Similarly, they would rebalance the portfolio and increase debt investment in a bearish market.
6. Taxation benefits:
As Aggressive Hybrid Funds invest more than 65% of its portfolio in equity, these funds are taxed like equity funds. The details of the tax levied on aggressive hybrid funds are tabled below.
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.
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.
- 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 with moderate risk tolerance. Ideally, you can invest in these funds for the long-term financial goals with the time horizon of at least 5 years to allow the fund to realize its full wealth-creation potential.
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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