A comprehensive exploration of aggressive hybrid funds

57-Sunila K.C. Sunila

IN THE COMPLEX LANDSCAPE of investment options, aggressive hybrid funds stand out as a traditional choice for investors. These mutual funds, nestled within the hybrid scheme, predominantly invest in stocks while also incorporating a measured allocation in debt instruments. This unique blend positions them as a well-rounded investment avenue, providing a strategic mix of risk and stability.

According to SEBI scheme categorisation, aggressive hybrid funds are mandated to maintain a balance, allocating between 65 per cent and 80 per cent of their portfolio to equities and related instruments. The remaining portion finds its place in debt securities. This strategic allocation strategy aims to spread investments across different avenues, mitigating risk and thereby ensuring these funds are less volatile than their pure equity counterparts.

Equity, as an asset class, bears the potential to generate long-term wealth, while debt offers stability and a steady income stream. Aggressive hybrid funds, by combining these elements, strive to deliver the best of both worlds within a single investment product. The equity portion fuels return during market upswings, while the debt component acts as a stabilising force during market downturns, offering a unique dual-role investment proposition.

Aggressive hybrid funds present an attractive option for a broad spectrum of investors, from beginners to seasoned market participants. Specifically designed for those looking to step into equity investments without exposing themselves to the full risk inherent in pure equity funds, these funds are well-suited for individuals with a three- to five-year investment horizon or longer. Investors can align these funds with financial goals anticipated within the next three to five years, making them a versatile addition to a diversified portfolio.

The aspect investors must be mindful about is that though this type of fund is not as risky as pure equity mutual funds, aggressive hybrid funds carry moderately high risk because of their substantial equity component. During market corrections, investors may witness a decline in the investment value, but it is generally less severe compared with a pure equity mutual fund. And, in rising markets, these funds might underperform pure equity funds, given their allocation to debt instruments. However, over the long term, the return differential between aggressive hybrid funds and pure equity funds is relatively modest.

The hallmark of aggressive hybrid funds lies in their ability to provide true diversification. With a portfolio encompassing both high-risk, high-return equities and low-risk, low-return debt, investors benefit from this balanced approach. This not only ensures returns are not solely contingent on equity market movements but also provides a cushion during market corrections, underscoring the dual role played by the debt component.

Another advantage is their capacity to eliminate the necessity of buying multiple funds for exposure to different asset classes. The fund manager takes on the responsibility of asset allocation between equities and debt, simplifying the tracking effort required from investors. Also, an investor need not worry about the rebalancing process. Current regulations mandate a minimum of 20 per cent investment in debt funds at all times. As markets rise, the equity holdings increase in value, tilting the allocation mix in favour of equity. To restore balance, the fund manager sells stocks and invests in debt instruments, strategically selling equities at high points and purchasing them at lower levels.

Aggressive hybrid funds are treated as equity funds for tax purposes. This advantage provides investors with a tax-efficient investment avenue that combines the benefits of both asset classes. Short-term capital gains, realised within one year, are taxed at 15 per cent, while long-term capital gains are tax-free up to Rs1 lakh and taxed at 10 per cent beyond that.

To conclude, aggressive hybrid funds emerge as a compelling investment option, seamlessly combining the growth potential of equities with the stability of debt. Their strategic asset allocation, and tax advantages, make them a versatile choice for investors seeking a balanced and adaptive investment strategy. As investors navigate the complex world of finance, aggressive hybrid funds offer a roadmap that bridges risk and stability, potentially unlocking long-term wealth creation.

Sunila is founder, Jupiter Fintech Solutions