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What is Aggressive Hybrid Fund? Why Should You Invest In It?

IndianMoney.com Research Team | Posted On Thursday, February 27,2020, 11:36 AM

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What is Aggressive Hybrid Fund? Why Should You Invest In It?

 

 

Investor interests vary and so do their investment choices. Some investors go for debt funds which ensure safe returns and low risk, while others opt for equity funds which involve high risk and good returns. Then there is the third category of investors, who would like to taste diversification.

Hybrid funds invest both in debt and equity instruments. This fund offers an ideal blend of both the instruments. The risk involved will be lesser than equity funds and returns are higher than debt funds. This option is often chosen by investors who wish to diversify their portfolio and reduce concentration risk.

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What is Aggressive Hybrid Fund? Why Should You Invest In It?

What is Aggressive Hybrid Fund?

Aggressive hybrid funds are a kind of hybrid fund, which differs from regular balanced funds. The debt and equity proportions are decided based on the investment objective. Availability of investment choices is much higher in aggressive hybrid funds. Another important factor that differentiates aggressive hybrid funds is that, they can take advantage of arbitrage opportunities, which is not allowed in regular hybrid funds. In arbitrage, the fund manager utilizes price changes across different markets and makes a profit. This flexibility makes it all the more favorable.

In aggressive hybrid funds, 20-35% of the fund must be allocated to debt instruments and 65-80% must be allocated to equity instruments. Selection of instruments also varies based on the investor objective.

See Also: Things to Know About Hybrid Mutual Funds

Things To Know While Investing in Aggressive Hybrid Fund

Risk: There is a moderate level of risk involved in these funds, due to the presence of equity. But the presence of debt help balance out the risk to an extent. If the fund consists of small cap stocks and lower credit rated debt securities, then the risk involved can be very high.

Return: Due to the availability of arbitrage opportunity, returns are higher than debt funds. At the same time, stable returns are not guaranteed from these funds because change in interest rates can negatively impact the performance of the fund. Returns from equity depend on market dynamics. 

Cost: It charges an annual fee for fund management services. Due to increased trading activities, the expense ratio of these funds is generally higher. To ensure profits are stable, one must choose a fund with low expense ratio.

Financial goals: This fund is ideal for meeting medium term financial goals like buying a car or funding a vacation. For new investors who would like to gain exposure to the equity market, but with controlled risk, can also invest in this. Debt securities will help reduce concentration risk.

See Also: What are Balanced Funds?

Investment horizon: Because equity instruments are involved, it is wise to stay invested for the medium to long term. This helps fully exploit the potential of the stock markets. If interest rates are rising, then short term investments are great to prevent the erosion of fund value.

Tax: These funds are treated as equity funds for tax purposes. If the holding period is less than a year, then gains are considered as short term capital gains and are taxed at 15% + cess. If they are held for more than a year, then gains above Rs 1 Lakh are tax free. Anything above is taxed at 10% (without indexation).

Why Should You Invest in Aggressive Hybrid Fund?

Investing in aggressive hybrid funds does have the following advantages:

  1. Portfolio Diversification: Hybrid funds are a combination of debt and equity. Diversifying the portfolio gives an edge against risks.
  2. Easy management: Instead of having different investments managed by different fund houses, in hybrid funds, different kinds of investments can be managed by the same fund house. This reduces the overall cost of the investments.
  3. Switching: This is done to tap arbitrage opportunities.

See Also: Mutual Fund Returns

Risks of Investing in Aggressive Hybrid Fund

  1. Active management risk: The performance of these funds depends on the manager’s opinion on market movements. If the fund manager fails to monitor the market trends effectively, it will adversely impact the fund’s performance.  
  2. Objective mismatch: It is important that the objectives of the investor and the fund are on the same page. Objective mismatch results in underperformance of funds.
  3. Interest risk and market risk: Debt and equity involve interest rate risk and market risks. Therefore, allocation of funds must be done with utmost care.

Top 5 Aggressive Hybrid Funds 2020

Fund name

3 year return (%)

5 year return (%)

ICICI prudential equity and debt fund

13.69

18.9

SBI equity hybrid fund

11.21

18.3

ICICI prudential child care fund

12.30

19.81

Reliance equity hybrid fund

12.71

19.09

DSP BlackRock equity and bond fund

10.2

9.9

Conclusion

Aggressive hybrid funds are an ideal option for wealth creation and generating income. It can be chosen by new investors who would like to experience a taste of equity. It is safer compared to traditional equity funds. Researching the fund before investing is a pre-requisite for stable and high returns.

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