What are Best Aggressive Hybrid Funds and How to Invest

Aggressive Hybrid funds work on the principle of asset allocation. Risk profiles differ between asset classes. By diversifying your investments across debt asset and equity classes, these schemes aim to reduce risk while simultaneously generating returns for you. Here, we will explore more about aggressive mutual funds and the related aspects that you need to know before investing.

Aggressive Hybrid Fund Meaning

As per SEBI, an aggressive hybrid fund is a mutual fund that invests between 65 and 80% of its total assets in equity and equity-related securities and the rest 20% to 35% in the debt instruments and other money market instruments. This specific strategy of spreading the investment in different types of securities enables this scheme to remain comparatively less risky than the pure equity funds with almost similar returns in the long run.

When the equity market is in turmoil, the portfolio's debt part softens the setback. This makes it easier for new investors to keep investing without worrying about volatility. So, if you are bothered about volatility and uncertainties in the market and want to create wealth, aggressive hybrid mutual funds are a viable option. 

Understanding How Aggressive Hybrid Funds Operate

As discussed, aggressive hybrid funds function by investing in equity and debt. As an asset class equity offers generous wealth for investors over the long term. On the other hand, debt provides stability and a regular source of income. Together, the fund essentially aims to offer the best of both asset classes in a single investment product. When the equity market performs well, its equity portion contributes to generating returns, and when the market performs poorly, its debt portion provides a cushion that stabilizes returns.

So, this investment is ideal for all types of investors to include their portfolios such as first-time equity investors, individuals who are near their retirement age, and investors with a 3 to 5 years investment horizon.

Factors to Consider When You Invest in Aggressive Hybrid Funds

Before investing in the best aggressive hybrid fund, you must consider the following factors:

• Financial Goals

The returns that are derived from this mutual fund are largely dependent on equity-linked schemes. So, if you are looking to generate long-term gains, you can opt for this aggressive mutual fund if your investment horizon is 3 years or higher. However, in case it is 5 years, consider availing of this mutual fund as they build up a good retirement corpus quickly. So you may invest in this fund depending on your financial objectives.

• Risks

As compared to pure equity funds, hybrid funds are less risky. It is because part of the fund is invested in other market instruments. Equities are highly volatile market instruments and therefore aggressive hybrid funds do carry a significant amount of risks. Investment value is likely to fall when a market corrects itself, but it is less than what a pure equity mutual fund experiences.

• Cost

Funds charge an annual fee for providing you with smooth fund management services. When investing in an aggressive mutual fund it is crucial to analyse the fund’s expense ratio. You should look out for an aggressive fund with a low expense ratio, as a high expense ratio can affect your profit adversely. So, selecting a plan with a lower expense ratio might provide you with greater returns. 

• Returns

Returns are proportionate to the choice of securities and stocks in the portfolio. However, a slight change in the overall interest rate in the Indian economy might adversely affect the fund returns, impacting the price of underlying debt securities.

Advantages of Aggressive Hybrid Mutual Funds

Aggressive hybrid funds have various benefits. This includes:

• Ease

Mutual fund when hybrid in nature eliminates the need of buying multiple funds for exposure to different asset classes. Further, the fund manager is responsible for taking care of asset allocation between two asset classes.

• Relatively Less Volatility

This type of mutual fund is comparatively less risky than pure equity funds. It signifies that if the market fall and equities decline, the risk in these funds is limited to the extent to which it’s invested in equities. In this regard, the debt component in the portfolio helps to mitigate this blow.

• Automatic Rebalancing

One of the notable advantages of aggressive hybrid mutual funds is that they rebalance their asset allocation rigorously within the prescribed limit. As per the current laws, these funds should invest at least 20% in debt instruments. As a result, when the market rise, equity holdings gain value and the allocation distribution shifts to favour equity. To get the balance back, the fund manager sells some stocks at high prices but buys stocks at low prices.

• Diversification

This type of mutual fund allows you to have a diversified portfolio, containing high-risk, high returns asset class-equities and low-return asset class, low risk-debt. 

• Taxation Benefit

As per the current tax laws, mutual funds that invest 65% or more of their assets in equity-related instruments or equity are eligible for equity taxation. This signifies that in spite of debt exposure in the portfolio that may rise to 35% of its assets, you can benefit from equity taxation. Some of the tax implications of this type of fund include:

1. Short-term capital gains: It is the investment holding period of less than 12 months. They are taxed at a flat rate of 15%.
2. Long-term capital gains: With a holding period of 12 months or more (long-term capital gains) are exempt from tax up to ₹1 lakh a year and are taxed at 10%.

Final Thoughts

It is important to assess your financial goals, investment horizon, risk tolerance, etc. before you start looking for different aggressive hybrid funds. This will allow you to choose the scheme that complements the rest of your investment portfolio so that you can fulfil your financial objectives.