As we near the end of the year, equity markets are registering a strong rallying and touching fresh highs in recent weeks. All macroeconomic measures such as GDP (Gross Domestic Product) growth, IIP (Index of Industrial Production), automobile sales have been way above expectations and inflation is largely under control.
However, at elevated levels, the markets are expensively valued and do not offer comfortable entry points. Interest rates are close to peaking out and so are bond yields. Thus, fixed income instruments may offer attractive accruals at present.
Deciding the allocation between equity and debt may not be an easy decision to make.
So, for investors with an above-average risk appetite looking to systematically grow their wealth with a diversified mix of instruments, aggressive hybrid funds may be a good choice, given the upside from equities and the stability of fixed income that they provide.
Here’s more on why aggressive hybrid funds work well over the medium to long term and are suitable additions for your portfolio, with the added benefit of favourable taxation.
Favourably blending equity and debt
Market regulator has a mandate for aggressive hybrid funds that requires these schemes to invest 65-80% of their portfolio in equities and the remaining 20-35% in bonds or debt instruments.
Investing in a blend of equity and debt has many benefits when done via the aggressive hybrid fund route.
Diversification via single fund: Investing in aggressive hybrid funds would ensure that you get to invest in equity and debt – two asset classes - via a single fund. Some aggressive hybrid funds also use arbitrage to reduce equity risk via hedging and also to generate some income opportunities via smart strategies.
Asset allocation made easy: For investors wanting more of equity, but with a blend of debt thrown in, it may not be easy to decide the right mix of assets. By investing in aggressive hybrid fund, you can get a solid blend of equity and debt and the right mix is decided by the fund manager based on internal models, valuations and market conditions.
Equities are long-term wealth creators and ensure that financial goals are reached comfortably. The debt portion ensures stability in the portfolio and regular income generation.
Flexible mandate: There are no restrictive clauses on the stocks and bonds that the fund can invest in. Therefore, aggressive hybrid funds are free to pursue multi-cap or flexi-cap strategies as their fund managers deem fit. Also, on the debt side, the fund can explore bond strategies such as accrual or duration calls based on interest rates, inflation, macroeconomic indications and so on.
Risk reduction: When equity and debt are blended together, the overall risk in the portfolio is reduced as they are uncorrelated assets. They ensure diversification and also help you stay invested across market cycles. The mix ensures that investors get optimal risk-adjusted returns over the long term.
Another key advantage that hybrid funds in general have is that they lend themselves to both lump-sum and SIP (Systematic Investment Plan) investing. Since an optimal asset allocation pattern is followed by the fund manager, there is no timing risk of entering the markets.
Favourable taxation: Given that aggressive hybrid funds have 65% or more of their assets in equity and equity related instruments, they are given the benefit of equity taxation. Gains of more than Rs 1 lakh are taxed at a rate of 10% if the holding period is one year or more.
Steady performance
Aggressive hybrid funds have done quite well over the years as a category. They have generally tended to deliver high double-digit returns over medium and long-term periods, and have comfortably beaten inflation. The category average return over the past 3, 5 and 10 years have been 16.3%, 13.3% and 14% respectively.
Another key aspect investing in these funds is that they fall much less than the markets during corrections. Over the past five-odd years, in every moderate to large correction, these funds have seen their NAVs fall much less than the Nifty 50. Therefore, portfolio drawdowns are significantly lowered.
In this category we have ICICI Prudential Equity & Debt Fund, which is one of the consistent performing fund. In accordance to one’s portfolio, your overall asset allocation pattern, time horizon and financial goals one can consider investing in these funds.