Aggressive Hybrid Funds

What are Aggressive Hybrid Funds?

Aggressive Hybrid funds are just another moniker for Equity Oriented Hybrid Funds. By concept and method, Hybrid funds are called so because they invest money in different types of asset classes, like equity and debt assets. The allocation of funds to equity-based securities is higher than other securities.

The SEBI mandates require that Aggressive Hybrid Funds must invest between 65% and 80% of the funds in equity or related market securities. The debt component in these funds is typically kept low, between 20% and 35%. This is because all securities have their unique risk profiles.

Who Should Invest in Aggressive Hybrid Mutual Funds?

Aggressive Hybrid Funds returns depend largely on how the equity instruments are performing in the market. For this reason, it is best if the following people invest in this type of 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

Taxability of Aggressive Hybrid Mutual Funds

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. 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.

Risks Involved in Aggressive Hybrid Funds

Hybrid funds, in general, are considered to be less risky than pure equity funds. This is because of the fact that part of the fund component is invested in market instruments other than equities. 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.

Advantages of Aggressive Hybrid Mutual Funds

Mutual funds yield more favourable results when they are hybrid in nature. Let’s see some of the benefits, listed as under:

  • 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