What are Aggressive Hybrid Funds?
Aggressive Hybrid Mutual Funds comprises a type of hybrid mutual fund that primarily invests in stocks and other similar kinds of securities. They typically allocate around 65-80 per cent of the overall investments to stocks with the remaining 20-35 per cent to be invested in debt as well as money market funds as stipulated by SEBI.
These funds target a high rate of returns due to high exposure to equities and the debt component helps to cushion against market volatility. Aggressive hybrid funds are, as opposed to conservative or balanced hybrid funds, geared toward more growth rather than stable income. This is why they are appropriate to those investors who can afford greater risks, and are more interested in long-term growth of capital.
Aggressive hybrid funds place an equal emphasis on the possibilities of long-term growth that equities offer and the stability that a debt fund provides to strike a balance between highly-aggressive all-equity funds and more conservative hybrid funds.
Understanding the Working of Aggressive Hybrid Funds
- Aggressive mutual funds operate by dedicating a significant portion of their total holdings to the equity options such as large-cap, mid-cap, and small-cap stocks. The rest of it is invested in debts, like government bonds, corporate debentures or even treasury bills.
- The specialty of these funds lies in the ability of the fund manager to balance the portfolio to take advantage of opportunities available.
- Fund managers could also involve arbitrage to exploit the differences in prices by purchasing in another market and selling in another.
- They may adopt the growth or value investing approach depending on the market trends.
- On the debt aspect, they have a choice to issue instruments with different maturity structure or exposure to interest rates.
Aggressive Hybrid Fund Characteristics Every Investor Should Know
- Aggressive hybrid funds combine both equities and debt securities and provide the benefit of both asset types in a single fund.
- They have at least 65 per cent of their assets in equities and thus are taxed as equity funds by the government, a factor that makes them a tax-effective investment for an investor.
- Best suited for medium-to long-term goals such as the purchase of a home, children’s education or for retirement retirement.
- Although they are less risky compared to pure equity funds but riskier than debt or conservative hybrid funds.
- Since these funds usually offer more returns than the debt funds, they are often better than pure equity funds.
- The level of risk is also affected by a number of things including the quality of the underlying debt, the movement of interest rates as well as the composition of small-cap and mid-cap stocks in the portfolio.
How Aggressive Hybrid Funds Help You Grow Wealth
Good Growth Potential: 80 per cent of such funds can be invested in stocks, which present good growth advantages.
Debt Risk Buffer: Aggressive funds are 20-35 per cent in debt, thus they provide a safety against market fluctuations and offer effortless investment.
Medium to Long-Term Fit: Suitable for an investment horizon of 3-5+ years or more.
Tax-Efficient Returns: Classified as equity for taxation and provides tax advantages in the form of capital gains.
Less Volatile: Ideal for beginners as they are not as volatile as a pure equity fund.
Dynamic Allocation: Equity and debt allocations are adjusted in accordance with the market trends under SEBI regulations.
Liquid Investment Options: Invest in SIPs (as low as 500 INR/ month) or through a Lump Sum.
Portfolio Diversification: They minimise risks as well as maximise returns through diversification of your portfolio.
Risks Associated with Aggressive Hybrid Mutual Funds
Aggressive hybrid funds are comparatively less risky than pure equity funds, but they are not entirely risk-free. The following are the risks that have to be taken into consideration:
Equity Market Risk: Stock investing may lead to fluctuations and price variation particularly when the investment funds focus on mid-cap and small-cap shares.
Debt Quality Risk: When debt securities are not chosen properly, credit risks may arise especially when the issuer defaults on interest or repayments.
Interest Rate Risk: Securities increase in price when the interest rate is low. When the interest rates increase, the prices of bonds decrease, which may affect the net asset value of the investment (NAV).
Uncertainty: There is no guarantee of returns – even the debt portion can be impacted by market conditions.
Expense Ratio: Aggressive hybrid funds like all the mutual funds, charge an expense ratio.
Important Points to Evaluate Before Investing in Aggressive Hybrid Funds
Look into the given points carefully before investing in aggressive hybrid funds.
Risk Tolerance: Learn the level of risk you can take whether the market increases or decreases. These funds are quite fluctuating, so you need to be ready to take risks.
Investment Horizon: This kind of investment is ideal among investors who can wait patiently between 3 and 5 years so that sooner or later there may be a time to recover when the economy experiences downturns.
Track record of Fund Manager: Select funds whose managers have a good record of performing well and managing risks.
Portfolio Diversification: Make sure that you have diversified your entire investment plan. Do not build your entire portfolio on aggressive funds.
Inexpensive: Check the cost ratios of the fund. Even 0.5 percent difference in expense ratio can significantly impact long term returns.
Evaluated Properly: Review your investments periodically and make changes as per your evolving goals and market movements.
Investors Well-Suited for Aggressive Hybrid Mutual Funds
These funds are suited for:
Medium to High- Risk Investors: People who can take risks in the process of getting relatively higher returns compared to debt or balanced hybrid funds.
Investors who want balanced growth: Investors who want to invest in stocks but need some safety against the risk of debt.
First-Time Equity Investors: Individuals who have never invested in mutual funds and are looking to begin investing in manageable stocks.
Goal-oriented Investors: For those individuals whose financial goals have a time horizon of 3 to 10 years, such as children’s higher education, weddings or retirement planning.
How to Place Money in Aggressive Mutual Funds
This is how you can invest in aggressive hybrid funds:
Select Your Goals: Set your financial objectives, such as home or retirement savings.
Select the correct fund: Research the fund, its record, the experience of the fund manager, the costs incurred by the fund by checking the expense ratios, and the risk of the top aggressive hybrid funds.
Full KYC: You are to ensure that you complete the KYC (Know Your Customer) process which is a must to invest in mutual funds.
Select an Investment Medium: Select a reliable platform to invest.
SIP or Lump Sum: You can choose a Systematic Investment Plan (SIP) in case you wish to make a steady and regular investment or a lump sum investment in case you are willing to invest a large amount.
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