Aggressive Funds

Due to the diverse risk appetites of investors, SEBI has categorised hybrid funds into seven subtypes. Among these, Aggressive Hybrid Funds stand out with a higher allocation to equities, aiming to deliver superior returns with increased volatility.

This article will explore what Aggressive Hybrid Funds are, covering the details of their features and the potential benefits of investing in them. It will also discuss their asset allocation criteria and the factors investors must consider before they begin investing in them.

What are Aggressive Funds?

Aggressive Hybrid Funds are a category of hybrid mutual funds that invest a massive portion of their assets in equities while maintaining a smaller allocation in debt instruments. According to SEBI guidelines, these funds must allocate more than 65% of their portfolio to equities and the remainder to debt and cash and cash equivalents.

the equity component of Aggressive Hybrid Funds aims to generate capital appreciation over the long term

the debt component provides stability and income

Investing in an Aggressive Hybrid Mutual Fund provides diversification across asset classes, making it less risky than pure equity funds while still being more growth-oriented than Balanced Funds or Conservative Funds.

Features of Aggressive Hybrid Mutual Funds

The primary objective of an Aggressive Hybrid Fund is to provide a balance between capital growth and risk mitigation. Since these mutual funds allocate 65-80% of their portfolio to equities and the rest to debt, they offer investors a middle-ground between pure equity funds and debt funds.

Higher Equity Allocation: The majority of the fund's assets are invested in equity and equity-related instruments. This part of the portfolio is geared toward long-term capital appreciation.

Portfolio Rebalancing: Fund managers continuously monitor market conditions and rebalance the portfolio as needed. For example, during bullish markets, the equity allocation may be increased, while during bearish markets, the debt portion may be expanded to protect returns.

Debt Allocation: A smaller portion is invested in fixed-income securities such as bonds, government securities, and corporate debt. This allocation provides a hedge against equity market volatility.

Risk Exposure: These funds offer higher returns than debt funds but with greater volatility, making them suitable for investors with a 'High' to 'Very High' risk appetite.

Diversified Portfolio: These funds invest across various sectors and companies, further diversifying the risk and improving the potential for returns.

Advantages of Aggressive Hybrid Funds

An aggressive growth fund has several advantages that make it appealing to investors who are seeking a growth-oriented yet balanced investment approach:

Active Management and Flexibility: Aggressive growth funds are actively managed by experienced fund managers who constantly monitor market conditions and adjust the portfolio accordingly. This flexibility allows them to seize opportunities and mitigate risks in real time, potentially outperforming passive investment strategies.

Potential for Higher Returns: The aggressive focus on equities offers the possibility of making significant capital gains. By strategically allocating assets and timing market movements, fund managers can aim to generate returns that exceed those of traditional fixed-income investments.

Hedging Against Market Downturns: The inclusion of debt instruments in the portfolio can act as a hedge against market downturns. When equity markets are volatile or declining, the debt portion can provide stability and help limit losses.

Tax-friendly rebalancing: Rebalancing means buying and selling mutual fund units to keep the right mix of investments. When you sell mutual fund units, you may need to pay capital gains tax on any profits made. If you have separate equity and debt funds and sell them to adjust your portfolio, you’ll be taxed on any gains. However, with hybrid funds, the portfolio is automatically rebalanced at set intervals, so investors don’t have to pay capital gains tax during the rebalancing process.

Disadvantages of Aggressive Hybrid Mutual Funds

While aggressive hybrid funds offer growth potential, they also come with certain drawbacks:

High Risk During Volatility: Due to their significant equity exposure, these funds can be highly volatile during market downturns, making them unsuitable for risk-averse investors.

Lower Stability: Aggressive growth funds may not provide the same stability as debt funds, especially when market fluctuations are severe.

Expense Ratios: Actively managed funds like aggressive hybrid mutual funds often come with higher expense ratios, which can reduce overall returns over time.

Not Ideal for Short-Term: Investors who cannot stay invested for long periods may experience short-term losses due to the high-risk nature of these funds.

Who Should Invest in Aggressive Hybrid Mutual Funds?

Aggressive growth funds are suitable for investors with a 'Very High' risk tolerance and a long-term investment horizon. Here are some characteristics of ideal investors for these funds:

Risk Appetite: Investors who are willing to accept higher risk in exchange for potentially higher returns but want some level of stability through debt exposure

Looking for Balanced Growth: Investors seeking a fund that offers high capital appreciation but isn't as risky as pure-equity funds

Factors to Consider Before Investing in Aggressive Hybrid Mutual Funds

Before investing in aggressive growth funds, it's important to take several factors into account:

Risk Tolerance: Assess your comfort level with equity exposure and market volatility. These funds can experience significant short-term fluctuations due to their high equity allocation.

Investment Horizon: Ideally, aggressive growth funds should be held for at least 5-7 years to reap the benefits of equity appreciation and to ride out market volatility.

Fund Performance: Review the historical performance of the fund in comparison to its peers and benchmarks. Consistent performance over time is a key indicator of a well-managed fund.

Expense Ratio: Keep an eye on the expense ratio, as higher costs can erode your returns over time.

Taxation of Aggressive Hybrid Mutual Funds

For aggressive hybrid funds, which have an equity exposure of more than 65%, the taxation rules are as follows:

Long-Term Capital Gains (LTCG)

If you hold your investment for more than 12 months, the gains are taxed at 12.5%. Gains up to ₹1 lakh in a financial year are exempt from tax, and any gains above this threshold are subject to LTCG tax at 12.5%.

Short-Term Capital Gains (STCG)

If you sell your fund units within 12 months, the gains are taxed at a rate of 20%.

How to Invest in Aggressive Hybrid Mutual Funds?

You can invest in an Aggressive Hybrid Mutual Fund through the issuing fund house or online platforms like INDmoney. Follow these steps to invest:

• Open the INDmoney app and log in with your credentials.
• Navigate to the "Mutual Funds" section within the app.
• Use the filter options to select "Aggressive Hybrid Mutual Funds" to view the available options.
• Decide whether to make a lump sum investment or set up a Systematic Investment Plan (SIP) for regular contributions.
• Enter your desired investment amount and confirm the transaction.