Aggressive Hybrid Funds

Aggressive Hybrid Funds are mutual funds that invest mainly in stocks along with a limited allocation in debt instruments. These funds can have maximum exposure in equity up to 75 percent with at least 25 percent allocation to FD-like instruments.

This strategy of spreading the investment in different avenues ensures that aggressive hybrid funds are less risky than pure equity funds. And at the same time, they have the potential to offer similar returns as equity funds in the long term.

TAggressive hybrid funds invest in two asset classes together- Equity and Debt. As per the rules, these funds need to mandatorily invest at least 20% of its assets in debt instruments. The allocation to equity and equity-related instruments can only go up to 80% of the assets

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 and it generates regular income. 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. Their equity portion helps in generating returns when the equity market performs well, and the debt portion of the funds provide cushion to provide stability in returns when the market is underperforming.

These funds can perfectly fit in investors' portfolios for both new and experienced Investors.

• First-time Equity 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 corrections, the investment value doesn't fall as much as pure equity funds.

• Investors with a for 3-5 years Investment Horizon:

  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 financial goals which are about to come within 3-5 years. It will allow the fund to realize its full potential and thus achieve your financial goals.

• Investors who are near their retirement age:

  Investors who are nearing the age of Retirement and not saved enough for their Retirement corpus then Investing in Aggressive Hybrid Fund could be a good place to build a retirement corpus

• Risk:

  Aggressive hybrid funds are not as risky as pure equity mutual funds. But since they have a significant equity component, they do have a moderately high risk. So when the market corrects, you will see a fall in the investment value, but it is lesser than how much a pure equity mutual fund will fall.

• Returns:

  These funds will underperform pure equity funds in a rising market. That's because a part of the money invested by you is allocated to debt instruments. These instruments carry less risk than equity and therefore give lesser returns. However, in the long run, the return difference between these funds and pure equity funds isn't substantial.

• Financial Goals:

  These funds are a good option for your medium-term goals like buying a car or collecting money for your vacation. However, since you are taking quite a bit of equity exposure, be ready that in case markets correct in between or stay flat, you might have to extend the time-frame of your goal.

• Cost:

  Like any other mutual fund scheme, aggressive hybrid funds also charge an annual fee to provide you fund management services. A higher expense ratio cuts into the profits of the fund. While selecting a fund for investment, look for one with a lower expense ratio. Thus, opting for direct plans of the fund may provide higher returns than the regular plan due to a lower expense ratio.

Aggressive Hybrid Funds are treated as equity funds for the purpose of taxation.

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

• Diversification:

  These funds offer diversification in true sense with a portfolio that contains both high-risk, high-return asset class - equities and low-risk, low-return asset class - debt. This 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. The debt portion, therefore, plays a dual role in these funds

• 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.

• Automatic Rebalancing:

  The key advantage of Aggressive Hybrid funds is that they follow a rigorous rebalancing process to keep their asset allocation within the prescribed limit. As per the current laws, these mutual funds have to invest at least 20% in debt funds. So, when the markets rise, the value of equity holdings increase and the allocation mix gets titled in favor of equity. To bring back the balance, the fund manager sells stocks to a certain extent and invests the proceeds in debt instruments. So these funds sell equities at high and buy at low too, but it is to certain extent as their threshold for each asset class is defined.

• Taxation Benefit:

  As per the current Tax Laws, Mutual fund schemes which invest 65 percent or more of its assets in equity or equity-related instruments enjoy equity taxation. Hence, despite having debt exposure in the portfolio that may go up to 35 percent of its assets, investors can take advantage of equity taxation.

• 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 component in the portfolio would cushion the blow.

While selecting a fund, you need to analyze the fund from different angles. There are various quantitative and qualitative parameters that can be used to arrive at the aggressive hybrid funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite, and investment horizon in mind.