What are aggressive hybrid mutual funds?

Aggressive hybrid mutual funds are hybrid mutual fund schemes that focus on investing in growth stocks that have relatively more aggressive earnings projections than the norm is called an aggressive mutual fund. According to SEBI, aggressive hybrid mutual funds can invest 65% to 80% of their total corpus in equity and equity-related instruments and the rest in debt and debt-related instruments.

Aggressive hybrid mutual funds are actively managed funds. Fund managers can select investment avenues and instruments and take advantage of arbitrage options with an aim to earn higher returns. One of the main reasons behind the popularity of aggressive hybrid mutual funds is that they offer diversification with the potential of getting higher returns.

• Table of contents

• How does an aggressive hybrid mutual fund work?
• Features of aggressive hybrid mutual funds
• Advantages of aggressive hybrid mutual funds
• Types of aggressive mutual funds
• Who should invest in aggressive hybrid mutual funds?
• Where do aggressive hybrid mutual funds invest?
• What kind of returns can you earn from aggressive hybrid funds?
• Taxation rules of aggressive hybrid mutual funds

How does an aggressive hybrid mutual fund work?

Aggressive hybrid mutual funds aim to generate capital appreciation by primarily investing in equity while maintaining a smaller debt allocation. This combination seeks to offer higher potential returns compared to balanced or conservative hybrid funds, though it comes with greater risk.

Here’s how they function:

• Equity-driven strategy: These funds allocate 65% to 80% of their assets to equities.
• Debt allocation: The remaining portion is invested in debt instruments to provide relative stability.
• Active management: Fund managers alter the equity-debt mix based on market trends and investment outlooks (while adhering to minimum allocation limits set by SEBI).
• Growth-oriented approach: The primary goal is potential capital appreciation through investment in equities, making these funds more suitable for investors with a higher risk appetite.
• Portfolio rebalancing: Fund managers may periodically rebalance assets, selling those that have appreciated and buying undervalued ones to maintain the desired allocation.

Features of aggressive hybrid mutual funds

Here are 4 things you must know about aggressive hybrid mutual funds:

• Higher risk factor: Aggressive hybrid mutual funds, by definition, invest 65% to 80% of their assets in equity and equity-related instruments and carry a higher level of risk.
• Return on investment: Since these are actively managed funds and fund managers are free to leverage arbitrage opportunities, investors can expect a higher return potential when they invest in aggressive mutual funds but with higher risk.
• Higher expense ratio: Now that you know the aggressive hybrid mutual funds meaning, you can already guess that these are actively managed funds. This also means that you may have to pay more to the asset management company in the form of expense ratios for your investment.
• Suitable for medium-term financial goals: Aggressive hybrid mutual funds tend to perform well in the medium-to-long term. You can invest in them for 3 to 5 years or more based on your medium-term goals such as planning a dream vacation, buying a luxury car, etc.

Advantages of aggressive hybrid mutual funds

Aggressive hybrid funds provide a range of advantages:

• Diversification: They diversify across asset classes, including equities and debt, reducing overall portfolio risk.
• Potential for higher returns: The equity component offers growth potential, aiming for relatively higher returns compared to pure debt funds.
• Balanced risk: Combining equities for growth with debt for stability results in a balanced risk profile, suitable for various market conditions.
• Tax efficiency: Long-term capital gains from equity investments are tax-exempt, enhancing after-tax returns for investors.

Also Read: How can hybrid mutual funds help balance risk and returns?

Types of aggressive hybrid mutual funds

Aggressive hybrid funds are a type of hybrid mutual fund and there are no sub-types. However, depending on market conditions and the fund manager’s strategy, some aggressive hybrid funds may be more equity-oriented than others (while maintaining the mandatory 65% to 80% range). Within equities too, fund managers may have different strategies with regard to market capitalisation and investment style.

Who should invest in aggressive hybrid mutual funds?

You can invest in aggressive hybrid mutual funds if:

You are a new investor who wants to tap into the potential of equity investment schemes without stepping into pure equity schemes that carry a higher level of risk.

• You are a seasoned investor who wants to build a corpus for retirement or future investments.
• You are willing to make an investment with a high return potential that carries a moderate-to-high level of risk.

Where do aggressive hybrid mutual funds invest?

Aggressive hybrid mutual funds diversify investments across equity and debt, with an emphasis on equities.

Investment areas can include:

Equity investments:

• Stocks from large-cap, mid-cap, and small-cap companies.
• Equity-related instruments

Debt instruments:

• Government securities (G-secs).
• Corporate bonds with varying credit ratings.
• Money market instruments such as commercial papers and certificates of deposit.

What kind of returns can you earn from Aggressive Hybrid?

Aggressive hybrid funds aim to deliver higher potential returns than debt-oriented mutual funds. However, returns are not guaranteed and can vary based on market conditions.

Key factors to consider:

• Potential for strong returns: A higher equity component can potentially generate higher returns during market upswings.
• Market volatility: Significant equity exposure means returns can fluctuate, especially during downturns.
• Long-term growth focus: These funds suit investors with a long-term horizon, as they aim to build wealth over time.
• Equity market dependence: Performance is closely tied to stock market movements.
• Fund manager’s role: The manager’s asset allocation decisions and investment strategy play an important role in shaping returns.

Taxation rules of aggressive mutual funds

Aggressive hybrid mutual funds are taxed as equity funds since they invest over 65% of their assets in stocks.

Here’s how taxation applies:

• Short-term capital gains (STCG): Gains from selling units within one year are taxed at 20%.
• Long-term capital gains (LTCG): Gains from selling units after one year are tax-free up to Rs. 1.25 lakh in a financial year; gains exceeding this are taxed at 12.5%.

Also Read: What are hybrid mutual funds?

Conclusion

Aggressive hybrid mutual funds offer an investment avenue for those seeking capital appreciation through a mix of equity and debt. They can offer better potential returns than debt-oriented funds with lower risk than pure equity funds. The dominant equity allocation provides long-term growth opportunities, while the debt component adds a degree of relative stability. However, their higher equity exposure makes them riskier than other hybrid funds. Investors should assess their risk appetite, financial goals, and investment horizon before investing. While these funds can complement a diversified portfolio, they should align with an overall financial plan.

FAQs

What are aggressive hybrid mutual funds?

Aggressive hybrid mutual funds allocate 65%-80% of their portfolio to equities and the rest to debt instruments. They aim to provide potential capital appreciation through equity investments while using debt for some stability. These funds are best suited for investors with a high risk tolerance.

Are aggressive hybrid funds safe?

No mutual fund investment is safe. Moreover, due to their significant equity exposure, aggressive hybrid funds involve substantial market risk, making them suitable only for investors with a high risk appetite and a long-term investment perspective.

Why invest in aggressive hybrid funds?

These funds offer the potential for higher returns compared to pure debt funds while benefiting from diversification through debt. They are suitable for investors seeking long-term growth and willing to accept higher risk.

What is the exit load for aggressive hybrid fund?

Exit loads are set by the AMC and can differ from one company to another.

How do taxation rules impact the returns of aggressive hybrid mutual funds?

Since these funds maintain over 65% equity exposure, they follow equity taxation rules. Long-term capital gains (on holdings over one year) above Rs. 1.25 lakh in a financial year are taxed at 12.5%, while short-term capital gains (on holdings under one year) are taxed at 20%.

What factors contribute to the performance of aggressive hybrid mutual funds?

Strong performance is often driven by favorable equity market conditions, effective asset allocation, and skilled fund management. Sector selection, portfolio composition, and the ability to manage market volatility also play important roles.

What is the long-term performance of aggressive hybrid funds?

Long-term performance varies based on market cycles. Evaluating returns over 5-10 years provides a clearer perspective. Factors like return consistency, resilience during downturns, and risk-adjusted metrics like the Sharpe ratio help assess overall performance.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.