Mr Kaur wants to shift his investment from equity funds to slightly less risky investments to avoid losses from a frothy equity market. He has the goal to set up a sizable retirement corpus in a few years.
What investment option can he choose that will provide him with adequate returns?
Aggressive hybrid funds invest in both equity and debt, which reduces risk without sacrificing growth. This option will let Mr Kaur accomplish his financial goals while reducing the risk of his investments.
Now let us take a deep dive into the particulars of this hybrid fund.
These 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.
Also Read – https://navi.com/blog/all-about-flexi-cap-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 horizon
Fund managers of aggressive hybrid 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.
Also Read – https://navi.com/blog/money-market-funds/
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.
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 specialised skills to buy and sell securities. Accordingly, individuals do not have to track the markets or make investment decisions.
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.
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.
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.
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.
The taxability of aggressive hybrid mutual 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 less 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%.
Aggressive hybrid funds are suitable for investors willing to take risk 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.
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.
Before you go…
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.