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Aggressive hybrid mutual funds: understanding the what, why, when and who

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

Aggressive hybrid mutual funds: understanding the what, why, when and who


02 Nov 2022 - Contact Sayan Sircar
5 mins read

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

Aggressive hybrid mutual funds: understanding the what, why, when and who

Table of Contents

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.

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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 SEBI classification rule, 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.


Goal-based-investing plan

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 is tax calculated on selling shares/MFs and how do to do tax harvesting?

Who should invest in an Aggressive Hybrid Fund?

Aggressive Hybrid Funds are suitable for investors looking for long-term (>10-year) portfolio growth with the understanding that the intermediate journey can be volatile.

Risk-return profile of these funds funds

Risk-vs-return for hybrid 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 of time and does not show rolling performance. It shows 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 that 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.

Point-to-point return analysis

We use data compiled by Valueresearchonline as aggregate level to show return performance of these funds.

Lump sum returns

Aggressive Hybrid Mutual funds lump sum returns

SIP returns

Aggressive Hybrid Mutual funds SIP returns

How should investors interpret the above data?

Active and not passive funds

The wide variability of both returns and risk show that these are active funds. If you look at the fund documents of this category, there are 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 increase. Investor should carefully consider the risk aspect before investing in these funds if the goal is short or medium term.

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.

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Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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This post titled Aggressive hybrid mutual funds: understanding the what, why, when and who first appeared on 02 Nov 2022 at https://arthgyaan.com


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