What are Aggressive Mutual Funds?

Aggressive mutual funds in India typically refer to hybrid funds, which allocate a significant portion of their assets to equities while maintaining a smaller allocation to debt securities to balance risk. Aggressive funds are designed for investors seeking potential wealth creation opportunities over the long-term through equity exposure while maintaining a degree of relative stability via debt securities. This structure aims to utilise the long-term growth potential of equities while mitigating volatility through debt exposure.

• Table of contents

• Key characteristics of aggressive mutual funds
• Suitability: Who might consider investing?
• Comparing aggressive and other mutual funds
• Performance across market cycles
• Risks associated with aggressive mutual funds
• Selecting a suitable aggressive mutual fund

Key characteristics of aggressive mutual funds

• Asset allocation: As per SEBI guidelines aggressive funds invest 65% to 80% of their assets in equities, while the remaining 20% to 35% is allocated to debt securities for potential wealth creation and risk mitigation.
• Growth potential: The companies invested in are usually those that are expected to experience rapid expansion, usually in emerging or niche sectors.
• Risk Profile: These funds are typically categorized as "High" or "Very High" risk on the mutual funds risk-o-meter, reflecting their substantial equity exposure.
• Diversification: By investing across asset classes, aggressive mutual funds offer a level of diversification, potentially mitigating the impact of market volatility on the overall portfolio.
• Return potential: The high equity allocation offers the potential for higher returns, especially during bullish market phases, but can also be potentially volatile over the short to mid-term.

Suitability: Who might consider investing?

Identifying who should invest in aggressive funds depends on individual financial situations, investment goals, and preparedness for market volatility.

• Investors with a higher risk appetite: Those comfortable with market fluctuations in the short to mid-term in pursuit of higher potential returns over a long horizon.
• Long-term investors: Aggressive funds are generally intended for long-term investing. Individuals with investment horizons of five years or more, allowing time to navigate short-term market volatility and potentially benefitting from compounding over an extended horizon.
• Investors seeking diversification: Those looking to balance equity growth potential with the relative stability of debt within a single fund.

On the contrary, risk-averse investors or those with short-term financial goals might want to explore conservative or balanced funds, which typically have lower equity exposure and, consequently, relatively lower risk profiles.

Read Also: What are aggressive hybrid mutual funds

Comparing aggressive and other mutual funds

Aggressive mutual funds distinguish themselves through their high equity asset allocation and associated risk levels.

• Aggressive vs conservative funds: Conservative mutual funds typically allocate most of their assets to debt securities. This approach may lead to a modest but relatively stable return potential with lower associated risk. On the other hand, aggressive funds invest 65% or more in equities, resulting in higher potential returns especially over the long-term but also accompanied by higher volatility in the short to mid-term.
• Aggressive vs dynamic asset allocation funds: Aggressive hybrid funds maintain a consistently high equity allocation, regardless of market trends. This means the portfolio remains equity-heavy even during market peaks. On the other hand, balanced or dynamic asset allocation funds adjust their equity exposure based on market conditions, aiming to manage risk more actively.
• Aggressive vs pure equity mutual funds: While pure equity mutual funds invest entirely in stocks, aggressive hybrid funds include a debt component alongside their equity investments. This debt allocation can provide some cushioning during market downturns, potentially reducing the impact of equity market volatility.

Performance across market cycles

• Bull markets: Aggressive mutual funds have the potential to outperform during bull markets due to their high equity exposure and the nature of the underlying companies. This exposure can enable them to capture potential gains from rising markets, leading to potential growth and capital appreciation especially for long-term investors.
• Bear markets: In contrast, during bear markets, these funds may experience significant fluctuations in their net asset value (NAV). However, the debt allocation in hybrid mutual funds may potentially cushion drawdowns to some extent. This built-in diversification is one of the key features of aggressive mutual funds.

Understanding the performance of aggressive funds in market cycles is essential for investors to manage expectations and align their strategy with long-term investing objectives.

Risks associated with aggressive mutual funds

Investing in aggressive mutual funds involves several risks:

• Market risk: The value of investments may fluctuate due to market conditions, affecting the fund's performance.
• Interest rate risk: Changes in interest rates can reduce the market value of underlying debt securities.
• Credit risk: The chance that issuers of bonds or debt securities may fail to honour repayment, impacting fund performance.
• Liquidity risk: Difficulty in exiting positions quickly, especially during volatile market conditions, could lead to potential setbacks or delayed redemptions.

These risks of aggressive mutual funds highlight the importance of matching fund selection with personal financial goals and tolerance for volatility. This is because the associated risks with aggressive mutual funds are higher than other mutual fund types like pure debt funds or balanced funds.

Selecting a suitable aggressive mutual fund

While there is no one correct option when evaluating options for investing in best aggressive mutual funds, the following parameters can support informed selection:

• Fund performance: Assess multi-year performance across both up and down cycles. Look at risk-adjusted returns over 5+ years rather than chase short-term absolute numbers.
• Expense ratio: Over time, even marginal differences in costs can potentially influence long-term portfolio outcomes.
• Fund manager expertise: The decision-making ability of managers is crucial to how a fund responds to market changes.
• Portfolio composition: Analyse the sectors and securities the fund invests in to ensure alignment with your investment preferences.
• Risk-o-meter rating: Use the SEBI-mandated mutual funds risk-o-meter to understand how the fund is classified in terms of risk––from low to very high. This can help align the fund’s associated risk with your risk appetite.

Regularly reviewing and rebalancing your investment portfolio is advisable to maintain alignment with your financial objectives.

Read Also: Consider Exiting From Mutual Fund Scheme

Conclusion

Aggressive mutual funds can be suitable for investors seeking higher growth potential, but only if the investors understand the high-risk trade-off. These instruments can potentially create wealth over the long-term but they come with high risk, volatility and no guarantees. All aggressive mutual funds are regulated by SEBI with defined categories and mandated disclosures, ensuring transparency. However, regulation doesn’t make the investment immune from risks. Ultimately, whether an aggressive mutual fund is suitable for you depends on your financial goals and risk appetite.

FAQs:

Are aggressive mutual funds suitable for beginners?

Aggressive mutual funds may not be suitable for beginners because of the higher level of risk. Beginners may want to think about starting with funds like large cap funds that have a more moderate or conservative allocation until they learn how to handle risk.

What is the ideal investment timeframe for aggressive funds?

For aggressive mutual funds, a long-term investment is the more suitable strategy, at least five years if not longer, as this may allow the investor to navigate market cycles and potentially benefit from long-term equity appreciation.

How volatile are aggressive mutual funds?

Aggressive mutual funds typically have a high equity allocation. Thus, these funds are subject to higher volatility in the shorter term. The debt securities in an aggressive mutual fund can potentially mitigate volatility to some extent but not entirely.

What are the advantages of aggressive mutual funds?

Aggressive mutual funds offer investors the potential for higher returns through the equity component, with the debt component providing diversification benefits. Debt helps provide income potential and balances the overall risk profile of the portfolio.

Are aggressive mutual funds SEBI registered?

Yes. All mutual funds in India, including aggressive funds, are regulated by SEBI. The regulator defines categories and rules. An aggressive hybrid fund must invest 65% to 80% in equity and the rest in debt securities.