Aggressive Hybrid Funds: Working, Benefits And Who Should Invest In Them
Aggressive hybrid funds invest in both equity and debt, which reduces risk without sacrificing growth. If you have a goal to set up a sizable retirement corpus in a few years and want to shift your investment from equity funds to less risky investments, you can choose to opt for aggressive hybrid funds that will provide adequate returns.
This option will let you accomplish your financial goals while reducing the risk of his investments.
Now let us take a deep dive into the particulars of this hybrid fund.
What are Aggressive Hybrid Funds?
Aggressive Hybrid Funds are open-ended hybrid mutual funds that invest 65% to 80% of their assets in equity and equity-related instruments and 20% to 35% in debt instruments. Their high equity exposure allows them to capitalise on investment opportunities while providing stability to your portfolio.
Aggressive funds are less risky than equity funds owing to the debt exposure, which enables them to cushion the impact of a market correction. At the same time, they have the potential to provide similar returns allowing investors to generate wealth over time.
The fund manager plays an important role in deciding the returns of aggressive hybrid funds. Since they take all the investment decisions, their expertise and competence are major contributors to a fund’s performance. They can also identify and take advantage of arbitrage opportunities to get significant returns.
An Overview of Aggressive Hybrid Funds
Aggressive hybrid mutual funds work on the principle of planned asset allocation. Unlike other hybrid funds, aggressive hybrid funds are highly exposed to the equity market. They mainly focus on maintaining a high percentage (minimum 65%) of asset allocation in equity.
The total allocation in debt-oriented instruments is kept between 20-35%. The allocation is also rebalanced regularly to optimise the returns in a volatile market.
Another unique feature of aggressive hybrid funds is the fund manager’s ability to take advantage of arbitrage opportunities.
Who Should Invest in Aggressive Hybrid Funds?
Those with moderate risk tolerance
As aggressive funds invest mainly in equity, they provide higher returns than other classes of hybrid funds. That said, the high equity exposure makes such funds riskier. Hence, investors with moderate or high-risk appetite may consider investing in these funds.
First-time equity investors
These funds are ideal for those who want to invest in the stock market but do not want the risk of pure equity funds. Moreover, by investing in these mutual fund schemes, they do not have to purchase units in other funds for exposure to different asset classes.
Investors with medium to long-term investment horizons
Fund managers of hybrid aggressive funds aim to maximise the returns of investors keeping the scheme’s objective in mind. Investors with a medium or long-term investment horizon looking to maximise portfolio returns may consider investing in these schemes.
If you are seeking similar returns to equity funds but with reduced equity exposure, allocating funds to the Navi Equity Hybrid Fund might be a wise move. Investing in the Navi Nifty 50 and other Navi Mutual Funds is possible through platforms like Zerodha, Paytm Money and Groww, to name a few.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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Benefits of Investing in Aggressive Hybrid Funds
Here are some noteworthy benefits of investing in aggressive hybrid mutual funds:
- Reduced Risk for equity-centric Investors: Investors with a moderate risk appetite who wish to invest in equities but at the same time do not want the level of risk involved with equity assets can go for aggressive hybrid mutual funds. The 20-30% of debt investments reduce the risk exposure of equity-centric investors during market fluctuations.
- Diversification: Aggressive hybrid mutual funds offer true diversification because they are not solely dependent on a single asset class. These schemes invest in stocks of different market capitalization while ensuring sectoral diversification. Furthermore, these funds invest in debt instruments, thus mitigating portfolio risk.
- Rigorous Rebalancing: As per the rules laid by the Securities and Exchange Board of India (SEBI), aggressive mutual funds have to allocate at least 20% of their assets to debt instruments. The prescribed limit is rigorously rebalanced during market fluctuations to ensure lucrative returns in both bullish and bearish equity markets.
- Safer investment: Aggressive funds carry lower financial risk than pure equity funds, owing to the underlying fixed income securities. The debt instruments in the portfolio reduce the impact of stock market volatility.
- Diversification of assets: As different asset classes come with different risk profiles, fund managers of these hybrid funds apply the principle of diversification. They invest in both equity and debt sub-classes, which mitigates portfolio risk.
- Less volatility: These hybrid funds are less volatile than pure equity funds as their debt component provides a cushion against market corrections. At the same time, they provide enough capital growth to achieve one’s investment goals.
- Expertise in fund management: Aggressive hybrid funds are managed by experienced individuals who have many years of experience in investing. They use their knowledge, experience and specialized skills to buy and sell securities. Accordingly, individuals do not have to track the markets or make investment decisions.
Role of Fund Manager in Aggressive Hybrid Funds
The fund manager of an aggressive hybrid mutual fund plays a significant role in reaping the benefits from both equity and debt markets. He/she needs to have in-depth knowledge about both the asset classes and take informed decisions when it comes to balancing the allocations.
Fund managers are tasked with modifying the composition of the portfolio based on market performance. They can also take advantage of arbitrage opportunities to maximise portfolio returns.
Steps to Invest in Aggressive Hybrid Funds in India
You can invest in aggressive hybrid mutual funds by following these steps.
Step 1: Select the online investment platform through which you wish to invest.
Step 2: Register yourself on the platform by submitting the necessary documents and completing the KYC process.
Step 3: Under the mutual funds’ section, choose an aggressive hybrid fund scheme after comparing the different options available.
Step 4: Select the “Invest” option and enter the amount which you wish to invest as a lump sum or a SIP.
How to Select the Right Aggressive Hybrid Fund?
Some major factors that you need to consider when choosing hybrid funds are listed below:
- Age: Your equity exposure should be 100 minus your age. For example, if you are aged 33 years, then your equity exposure should be (100 – 33)% = 67% of your portfolio.
- Exposure to equity: You need to assess your risk tolerance level and ensure to pick only those funds whose risk levels cater to your requirements.
- Taxation: If the hybrid fund’s equity exposure exceeds 65%, it would be taxed like a normal equity fund.
Taxability of Aggressive Hybrid Funds
The taxability of hybrid aggressive funds is the same as equity funds as they have more than 65% investment in equity.
Short-term capital gains (STCG) are taxed at 15% in case of a holding period of fewer than 12 months.
If you redeem the fund’s units after a year, the gains are classified as long-term capital gains (LTCG). Gains of up to Rs. 1 lakh are tax-free in a fiscal year, while capital gains above this are taxed at 10%.
Factors to Consider Before Investing in Aggressive Hybrid Funds
Returns
The proportion of equity assets in an aggressive fund’s portfolio decides its chances of earning higher returns in bull markets. However, that does not mean these funds offer assured returns to investors.
Risks
Aggressive funds carry high exposure to equities and are moderately high-risk investments. If a particular fund has high exposure to low-quality debt instruments, it will carry even higher risk.
Financial goals
The investment objective of different individuals might not be the same. While one investor might want to build a retirement corpus, another individual might want to make adequate financial gains to finance his/her child’s education. In this regard, it is vital to make sure that the investment objective of the scheme matches your financial goals.
Expense ratio
AMCs (Asset Management Companies) charge a certain percentage as a fee for their services, which is called an expense ratio. Look for funds offering lower expense ratios to keep your net gains high.
Final Word
Aggressive hybrid funds are suitable for investors willing to take risks for achieving their goal of capital appreciation. Its equity component brings high returns and volatility to the portfolio while the debt portion provides stability. If you wish to invest in such mutual fund schemes, make sure to know essential details related to them, including tax implications and benefits, before investing.
FAQs on Aggressive Hybrid Funds
Ans: No, aggressive funds are open-ended funds with no lock-in period, so you can redeem the units of such funds anytime you want. However, many fund houses charge an exit load when investors redeem their units within a certain time (usually 1 year).
Ans: Before looking at different hybrid funds, take a look at your financial goals, investment horizon and risk tolerance. Next, create an investment plan to pick funds that suits all your requirements. You should also check various factors like the fund’s past returns, expense ratio, fund manager’s records etc.
Ans: Arbitrage refers to the process by which fund managers purchase stocks in one market and sell them in another market at higher prices. Fund managers of aggressive funds can take advantage of such opportunities to generate higher returns.
Ans: Yes, from FY21, dividends from these investments are taxed as per the investor’s income tax slab, while dividends above Rs. 5,000 are subject to 10% TDS. Moreover, there is a 4% cess and securities transaction tax (STT) of 0.001% when investors sell their units.
Ans: Yes, you can invest in aggressive hybrid funds through the SIP (Systematic Investment Plan) option. You can start investing with only Rs. 500 per month and give your bank standing instructions to debit the amount automatically.
Ans: Aggressive hybrid funds have less risk involved as compared with mutual funds. Moreover, aggressive hybrid funds have a larger allocation to equity or equity related securities.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
