This article discusses mutual funds belonging to the aggressive hybrid category for investors to understand if they should invest in such funds.

This article is a part of our detailed article series on the concept of hybrid mutual funds in India. Ensure you have read the other parts here: Show/Hide

📚 Table of Contents

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• What are hybrid mutual funds?
• What is an Aggressive Hybrid Mutual fund?
• How does SEBI define the Aggressive Hybrid Fund category?
• Are Aggressive Hybrid Funds active funds?
• What is the benchmark for Aggressive Hybrid Funds?
• How is an Aggressive Hybrid Fund taxed?
• Who should invest in an Aggressive Hybrid Fund?
• Risk-return profile of these funds
• Point-to-point return analysis
  • Lump sum returns
  • SIP returns
• How should investors interpret the above data?
  • Active and not passive funds
  • Unsuitable for short-term goals

What are hybrid mutual funds?

Hybrid funds offer a mix of multiple asset classes (equity/debt/gold/arbitrage/international stocks) in a single fund. The biggest selling points of a hybrid fund are:

• tax-free rebalancing: buys and sells inside a mutual fund does not incur any tax.
• emotion-free asset allocation changes: many investors miss out on rebalancing either due to lack of active monitoring, knowledge or fear of taxes
• one-stop portfolios for certain goals: for very short-term (less than five years) or very long-term goals (more than 10 years), certain hybrid funds can be considered as a part of a 1-2 fund simple portfolio.

What is an Aggressive Hybrid Mutual fund?

An Aggressive Hybrid Fund invests mostly in equity for growth and has a small amount of debt for stability purpose. A big selling point of this category of hybrid funds are equity-like taxation, automated rebalancing and single fund exposure to two asset classes.

How does SEBI define the Aggressive Hybrid Fund category?

An Aggressive Hybrid Fund, as per the SEBI classification rules, must have 65% to 80% investment in equity & equity related instruments; and 20% to 35% in Debt instruments.

Are Aggressive Hybrid Funds active funds?

There is currently no index fund operated in the aggressive hybrid category. All funds are active funds.

What is the benchmark for Aggressive Hybrid Funds?

This category of funds is usually benchmarked vs. the CRISIL Hybrid 35+65 Aggressive Index which invests in equity and debt in 65:35 proportion.

How is an Aggressive Hybrid Fund taxed?

Given that Aggressive Hybrid funds have an allocation to (Indian) equity of minimum 65, they are taxed as equity mutual funds.
For holding periods less than 365 days, profits are considered as Short Term Capital Gains (STCG) and taxed at 15%. If sold after 365 days, the profits are considered Long Term and taxed at 10% above ₹100,000 gains/year.

Read more here: How to calculate and save tax on mutual funds?

Who should invest in an Aggressive Hybrid Fund?

Aggressive Hybrid Funds are suitable for investors looking for long-term portfolio growth with the understanding that the intermediate journey can be volatile.

Risk-return profile of these funds

It is generally believed that hybrid funds have returned between pure debt and pure equity funds. It becomes interesting if you consider risk along with returns together. Please note that this chart is at a point in time and does not show rolling performance. It shows the last three years’ risk and return.

We can see the risk vs return, using data from Valueresearchonline, has some distinct clusters. We are also showing the current position of the Nifty 50 index funds at the intersection of two lines.

We can see that in this diagram most of the aggressive hybrid funds have given returns lower than the Nifty 50 index fund but the risk is also highest given the high equity exposure. We are therefore reiterating that investors should be mindful of this volatility.

These funds are taxed as equity funds. The current taxation rule is

Point-to-point return analysis

We use data from AMFI to show the return performance of these funds. These are averages of rolling returns.

Lump sum returns

SIP returns

How should investors interpret the above data?

Active and not passive funds

The wide variability of both returns and risk shows that these are active funds. If you look at the fund documents of this category, there is active decision-making involved at these points:

• equity portfolio composition: the stocks chosen do not passively mimic any index
• debt portfolio composition: just like the equity portfolio, the bonds here are also actively managed
• equity to debt allocation: the fund manager has the flexibility to move the equity allocation figure between 65-80% at will. The rest of the portfolio is allocated to debt assets

Unsuitable for short-term goals

Given the large equity allocation, the short-term returns for both SIP and lump sum investments fluctuate a lot. The fluctuation dies down as the time horizon of investment increases. Investors should carefully consider the risk aspect before investing in these funds if the goal is short or medium-term.

We have done an analysis of rolling over your PPF maturity amount into aggressive hybrid funds if you don’t need an exact amount in 5-years: PPF Account Maturity in 2025: How Much Higher Returns Can You Get if You Withdraw and Invest in Mutual Funds?

In a future article, we will cover more details like rolling return/risk vs other fund categories and using these funds for both accumulation and retirement.