Aggressive Hybrid Mutual Funds

• Investors willing to invest in funds that run a moderately high risk. Since market equities are volatile, and aggressive hybrid funds invest almost 80% of the total value in equities, the entire quantum could be affected adversely if the market crashes
• Some new investors can try out the market thrill with aggressive hybrid funds, as they don’t completely bank on equity and offer some respite by investing a third of the quantum in debt instruments
• Those looking to earn some income from their market investments can consider investing in aggressive hybrid mutual funds. Additionally, capital appreciation income is a good advantage that aggressive hybrid mutual funds provide
• For the investors looking to create wealth from their investment, these funds are ideal if the tenure is 3 years or higher. Aggressive hybrid mutual funds perform better in the longer run – for a period of, say, 5 years, you can consider an investment for the mid-range future goals

For the investors who are very close to their retirement age, aggressive hybrid funds make good sense, as these funds provide a way to quickly build up to a good retirement corpus. If you are 5 years away from retirement, consider starting investment in aggressive hybrid funds. They offer good growth opportunities with balanced risk

• Aggressive hybrid funds are a subset of hybrid funds. Hybrid funds deal in various types of market securities. Aggressive hybrid funds have about 80% of the funds invested in equity instruments, while the rest goes into debt or other market securities
• Aggressive hybrid funds returns work in two ways, because of the way the fund is split two ways between securities. The portion that goes into equity-based investments gives aggressive performance based on the market valuation of instruments; whereas, the debt portion of the fund works as a stabilizer and helps generate a stable income from the investment

Since aggressive hybrid mutual funds invest in two different asset classes that have no correlation, it provides some cushioning from a market crash – the investor doesn’t lose all their money in one go

Performance of Aggressive Hybrid Mutual Funds

Aggressive hybrid mutual funds can generate a high return for investors as they largely depend on equity-linked schemes. For this reason, it is best for the following investors:

• Investors who are willing to invest in funds run a moderately high risk. Aggressive hybrid mutual funds invest 80% of their corpus in equity-linked schemes, making them highly volatile to market conditions.
• Investors who want to earn capital appreciation income or regular dividend income can think of investing in aggressive hybrid funds.
• Investors looking to want to generate long-term capital gains through their investments. Aggressive hybrid funds are ideal if the tenure is 3 years or higher. The longer one stays invested in these funds, the higher the chances of generating a high return since the volatility to market risks are taken care of.
• Investors who are very close to their retirement age can also consider aggressive hybrid funds, as these funds provide a way to build up a good retirement corpus quickly. If you are 5 years away from retirement, consider starting an investment in aggressive hybrid funds.

Expense Ratio

When investing in a mutual fund, it is critical to analyze the fund’s expense ratio. SEBI has set expenditure ratio caps for mutual funds based on type and category. However, investors must choose funds with the lowest expense ratio.

Asset Allocation

Aggressive Hybrid Mutual Funds allocate about 65% – 80% of their corpus to high-risk equity-linked investments, while the remaining 20% – 35% equity is allocated to debt securities or money-market instruments. Since the focus is on generating a high return, the aggressive strategy has high associated risk but is lower than those who invest purely in equity funds. So investors should ensure that they properly plan their investment goal when investing in this scheme.

Taxability

The taxation of aggressive hybrid funds depends on the quantum of equity investments. Described below are the tax implications of aggressive hybrid funds returns.

• Long-term capital gains tax: Applicable if you have invested in aggressive hybrid funds with a tenure of one year or above, your capital gains from the fund are liable to be taxed at 10%. However, if the gains remain below ₹1 lakh, then the capital gains tax is exempt for the ongoing financial year.
• Short-term capital gains tax. Applicable if your aggressive hybrid mutual funds have been held for less than one year, all the proceeds from the fund will be taxed at a flat rate of 15%. There will be no exemptions from the short-term capital gains tax

Other types of hybrid funds are taxed differently for capital gains – long-term or short-term.

Investment Goal

Depending on the investment goal, aggressive hybrid mutual funds are ideal for those who have long-term financial goals like a child’s marriage, education, or retirement. Given the volatility and risk factor, the fund is not ideal for short-term financial goals, especially ones that depend on a stable return, like purchasing a car, house, etc.

Investment Horizon

The investor’s age and investment horizon are also vital when investing in aggressive hybrid funds. For young investors who want long-term wealth creation, these funds are the ideal option since they are relatively open to taking a risk in the short term. However, those older or close to retirement who expect a safer investment option should consult with a financial advisor before investing.

Direct or Regular Plan

You can also look into direct Vs. Regular plans when investing in any mutual fund. If you plan to invest in a mutual fund via a third-party agent, you will have to pay a part of the commission, which leads to lower returns compared to direct plans. Direct plans allow investors to make investment decisions on their own, needing them to pay no additional commissions and result in a lower expense ratio.

• Long-term capital gains tax. If you have invested in aggressive hybrid funds with a tenure of one year or above, then your capital gains from the fund are liable to be taxed at 10%. However, if the gains remain below ₹1 lakh, then the capital gains tax is exempt for the ongoing financial year
• Short-term capital gains tax. If your aggressive hybrid mutual funds have been held for a period of less than one year, then all the proceeds from the fund will be taxed at a flat rate of 15%. There will be no exemptions from the short-term capital gains tax

Other types of hybrid funds are taxed differently for capital gains – whether they are long term or short term.

Equities are a highly volatile (but lucrative, at the same time) market instrument. Investing an entire fund into it is a high-risk move because with the market movement, the game changes. Equity instrument values may rise or fall, even drastically, when the market corrects.

In such scenarios, introducing some percentage of debt assets in the fund helps to absorb the fall in the market. Since debt instruments are entirely different in nature vis-à-vis equity instruments, the market correction doesn’t affect this percentage of the investment as much. The shock of loss is substantially reduced in this manner.

With that said, when the market jumps, the equity share of the aggressive hybrid fund proportionately increases the investment value, delivering high returns to the investors. The debt component here may remain the same, more or less, and fetch interest from the companies invested in. This is the primary reason why aggressive hybrid mutual funds are recommended for those with a moderate risk appetite.

• Aggressive hybrid mutual funds enable a good degree of diversification in the portfolio. These funds have a significantly high equity component – they can be broken up into small-cap, mid-cap and large-cap components for generating variable aggressive hybrid funds returns
• Investment in a single aggressive hybrid fund enables you to cash in on the benefits of two asset classes with a single investment. You don’t even have to monitor anything. The fund manager works to decide how much of the fund component goes into equity, and how much into debt

Aggressive hybrid funds allow the fund manager to dynamically adjust asset allocation based on how the market is behaving. This capability of the fund makes it extremely favourable to cut loss risks and take maximum advantage of the investment.