Aggressive hybrid funds offer investors a balanced approach. These mutual funds allocate most of their capital to stocks while including a limited portion in debt instruments. In this article, we will explore how aggressive hybrid funds operate, factors to consider before investing, and the benefits they offer to different types of investors.
Aggressive hybrid mutual funds primarily invest in stocks with a limited portion allocated to debt instruments. They have a maximum equity investment limit of 75%. These funds offer lower risks compared to pure equity funds due to diversification. However, their long-term returns are similar to equity funds.
Usually, for stability, aggressive hybrid funds function by investing 20 per cent of their assets towards debt instruments. The remaining 80% goes to equity and equity-related instruments.
When the market is on an upswing, equity can carry the potential to generate viable returns that can help investors grow their wealth over the long run. Debt instruments help provide stability and a regular income stream if the market underperforms. So, this hybrid fund seeks to provide each asset class's best under a single investment.
Before investing in an aggressive hybrid fund, consider the following factors:
Aggressive hybrid funds have an annual fee for their fund management services. Look for funds with low expense ratios to maximise profits. Consider opting for a direct plan for potentially higher returns.
These funds can help with medium-term goals like buying a vehicle or funding holidays. However, as they expose investors to equity, be prepared for situations where markets remain stagnant, potentially requiring a longer investment horizon.
Aggressive hybrid funds carry less risk compared to pure equity funds. While they have a significant equity component, their investment value may fall less during market corrections than pure equity funds.
In rising markets, aggressive hybrid funds may not perform as well as equity funds due to their allocation to debt instruments. Debt instruments offer lower returns but also come with fewer risks. However, over the long term, the difference in returns between the two fund types is insignificant.
These funds are ideal for those who would like to begin dabbling in equities but don’t want to expose themselves to the risks linked to purely equity-oriented funds. Its debt component, the extent to which its value might fall in the market may get mitigated.
Since these funds primarily invest in equities, investors must be willing to allocate a reasonable time frame for them (3 to 5 years). This time frame will also allow the fund to maximize its potential.
Investors about to retire but don’t have a sufficient retirement corpus can use this fund to enhance their holdings.
Aggressive hybrid funds rebalance their asset allocation rigorously, keeping in mind the prescribed limit. Current laws dictate that these funds hold at least 20 per cent of these assets in debt instruments. Consequently, when markets rise, the value of equity holdings rises, and the allocation distribution favours equity. To return to the balanced level, a fund manager may sell stocks to a certain degree and invest the proceeds in debt securities.
Aggressive hybrid funds allow you access to a diversified portfolio with high-risk, high-return assets and low-risk, low-return assets.
These funds remove the need to invest in different funds to gain exposure to varied asset classes. Further, the fund manager is responsible for asset allocation between the two asset classes, and investors aren’t expected to do anything.
These funds are comparatively less risky than pure equity funds. If the markets fall and equities decline, the risks an aggressive hybrid fund will sustain are limited to the extent to which it’s invested in equities. The debt component of the fund can help cushion this blow.
Mutual funds that invest 65 per cent or more of their assets in equity and equity-related instruments are subject to equity taxation. It means that even if the debt exposure of such a fund’s portfolio rises up to 35 per cent of its assets, investors can utilise equity taxation.
Aggressive hybrid funds present a unique investment opportunity combining the best of equity and debt instruments. While they carry a certain level of risk associated with equities, they also provide stability through the allocation to debt. Investors must consider cost, financial goals, risks, and potential returns before choosing an aggressive hybrid fund. The benefits of automatic rebalancing, diversification, simplicity, limited volatility, and favourable taxation make aggressive hybrid funds attractive for investors seeking a balanced investment approach.
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Hybrid funds are aggressive as they allocate a major chunk of their assets towards equities.
You should invest in an aggressive hybrid fund if you are in any of these situations: