Aggressive Hybrid Funds : Basics, Things to consider and More
Aggressive hybrid funds are equity-oriented hybrid schemes. The primary objective of these schemes is to accumulate wealth and regular income in the long run.
How do Aggressive Hybrid Funds work?
Aggressive hybrid funds fall in the category of hybrid schemes. These funds have exposure to both debt and equity instruments in proportions specified in the scheme’s investment objective. As compared to plain vanilla balanced funds, these funds have differences when it comes to asset allocation. In the case of balanced hybrid funds, the fund manager is not allowed to take advantage of arbitrage opportunities. In arbitrage, the fund manager buys securities at a low price in one stock exchange and sells them at a higher price in the other. Gains accrue as a result of the price differential of the same security in a different market.
The autonomy and choice of investment options available to aggressive hybrid funds are much higher than balanced hybrid funds. Aggressive hybrid funds enjoy the flexibility to take advantage of arbitrage opportunities available in the market. These funds have to allocate at least 20% of the fund assets towards debt instruments. The investment in equity and equity-linked instruments varies between 40% to 60% of the fund’s assets. The manner of stock selection varies from growth to value. Similarly, the selection of debt securities differs from being highly sensitive to low-interest-rate sensitive.
Who should invest in Aggressive Hybrid Funds?
These funds aim at generating current income along with wealth accumulation over the long-term via a hybrid portfolio composition. These funds may are capable of yielding higher returns at a relatively higher risk than standalone balanced hybrid funds. The fund manager attempts to provide consistent returns by investing primarily in equity and a small portion of debt and money market instruments. Such funds are best suited to investors who have a moderate risk appetite and medium-term investment horizon of at least five years to seven years.
The budding investors who are new to market volatility may give these funds a try. Even within the same category, the level of risk among funds may vary depending on the presence of mid-cap and small-cap stocks. However, while picking funds for investing, quantitative and qualitative aspects of the fund must be analysed.
Things to consider as an investor
RiskAlong with debt instruments, aggressive hybrid funds are composed of equity shares as well, which makes them moderately high-risk investment opportunities. The net asset value (NAV) of the fund doesn’t fluctuate as much as that of pure equity funds. However, the presence of low-quality debt securities and small-cap stocks may increase the risk profile of the portfolio.
ReturnDespite having an asset allocation of more than 20% in debt and money market instruments, the returns are not assured. A change in the overall interest rate in the economy might affect the fund returns by impacting the price of underlying debt securities. But compared to pure debt funds, these funds generate above-average returns due to having exposure to arbitrage opportunities.
CostLike any other mutual fund scheme, aggressive hybrid funds also charge an annual fee to manage your investment. A higher expense ratio cuts into the profits of the fund. While selecting a fund for investment, look for the one with a lower expense ratio. The overall expenses of the fund might increase due to higher trading activity during high volatility. Thus, opting for direct plans of the fund may provide higher returns than the regular plan due to a lower expense ratio.
Investment HorizonIt relates to the time duration for which you plan to stay invested in the fund. Ideally, due to presence of equity, you need to have a moderate to long-term investment horizon for this fund. It will allow the fund to realise its full potential.
Financial GoalsYou may invest in this fund to support your medium-term goals like buying a car or going on an exotic vacation. You may also utilise this fund to accumulate a corpus for financing college education of your children. Newbie investors who want to take a controlled exposure to equity with the stability of debt may try their hands in this fund. This fund is suitable for those investors who wish to augment their monthly income. However, the dividends are not guaranteed.
Tax on GainsThese funds are treated as equity funds for taxation. The short-term capital gains (STCG) earned on the redemption of units within one year from the date of allotment are taxable at the rate of 15%. The long-term capital gains (LTCG) earned of redemption of units after one year are tax-free up to Rs 1 lakh. The LTCG over Rs 1 lakh is taxable at the rate of 10% without the benefit of indexation.
How to Invest in Aggressive Hybrid Funds?
Investing in aggressive hybrid funds is made paperless and hassle-free at ClearTax.
Using the following steps, you can start your investment journey:
Step 1: Log on to cleartax.in
Step 2: Enter all requested details
Step 3: Get your e-KYC done, it can be completed within 5 minutes
Step 4: Invest in the most suitable aggressive hybrid fund from amongst the hand-picked mutual funds
Top 10 Aggressive Funds
The table below shows the top-performing sector funds based on the past 3-year and 5-year returns:
|Fund||3-Year Performance||5-Year Performance||Link|
Advantages of Investing in Hybrid Funds
The following are some of the advantages of investing in hybrid funds:
- As these funds invest across both equity and debt securities, it naturally gives you the benefit of diversification.
- The fund manager modified the composition of the portfolio depending on the market conditions. He tries to reap the best out of both equity and debt segments.
- These funds are known to provide higher returns than a debt fund while carrying lower levels of risk.
- First-time equity investors may consider getting started by investing in a hybrid fund. This gives them a controlled exposure to equities.