Aggressive Hybrid Mutual Funds-everything you Want to Know
One of the big advantages of investing in mutual funds is that you have a wide choice. You almost have a choice for every need. Check the table below.
| Mutual Fund Type | When to choose that option |
| Equity Funds | Best suited when you want to create wealth in long run. They invest in equities so higher on risk and on returns. |
| Liquid Funds | You can park your funds for the very short term in liquid funds. They pay more returns thank deposits in savings accounts |
| Debt Funds | Give higher returns than liquid funds but lower than equity funds. They invest in fixed income instruments |
| Hybrid Funds | Hybrid funds invest in a mix of equity and debt and either equity or debt can predominate depending on the objective |
| Index Funds / ETFs | If you don’t want to take stock risk and just want index returns, then this is a good choice. You get Nifty / Sensex returns |
| ELSS Funds | These are equity funds but come with tax benefit on investment under Section 80C and also come with 3 year lock-in period |
| Gold Funds | They invest in gold and the returns on these funds are linked to the returns on gold over time |
| Fund of Funds (FOF) | Creates a fund by investing in other funds, and these are most commonly used for international investing via ETFs |
The purpose of the above table is to understand how there is a choice of funds for each investment objective or goal. The focus will be on Hybrid Funds.
Understanding the concept of Hybrid Funds?
As the name suggests, hybrid funds are a mix. That means they combine equity and debt in different proportions. It is somewhere in between an equity fund and a debt funds in terms of risk and returns. Typically, hybrid funds invest your money in both debt and in equity. The mix will depend on whether it is an aggressive hybrid fund or a conservative hybrid fund. Since hybrid funds are a mid-way, both equity fund and debt fund investors are more willing to look at that as it is closer to their own type.
What do we understand by conservative (DEBT) hybrid funds?
As we saw earlier, the hybrid fund spreads money across equity and debt. But, the question is in what proportion do they spread the money? That is based on the investment objective. Broadly, there are two categories of hybrid funds viz. Conservative Hybrid Funds and Aggressive Hybrid Funds. Let us start with conservative hybrid funds.
Conservative (debt) hybrid mutual funds allocate more than 70-75% of the corpus to debt instruments which include liquid assets, government securities, treasury bills, corporate bonds, institutional bonds, NCDs, municipal bonds, state government loans (SGL) etc. The balance portion is invested in equity. The advantage is that it is largely as safe as a debt fund but the small portion enhances returns to more than what debt funds offer.
What do we understand by aggressive (EQUITY) Hybrid Mutual Funds
Aggressive hybrid funds invest more than 65% of the corpus in equity instruments. This proportion can go even up to 80-85% in equities at times. The balance portion is allocated to debt. For investors who are not very aggressive, they can opt for aggressive hybrid funds first before starting to invest in equity funds. The presence of small portion of debt gives these aggressive hybrid funds some stability in the market and in terms of returns.
What are advantages of both the types of Hybrid Funds?
The table below captures the gist of the advantages of aggressive hybrid funds versus conservative hybrid funds.
| AGGRESSIVE HYBRID FUNDS | CONSERVATIVE HYBRID FUNDS |
| Aggressive hybrids act as a risk reduction tool for equity fund investors | Conservative hybrids act as a return enhancing tool for debt fund investors |
| These offer an easier way to diversify risk for an equity fund investors | They help debt fund investors diversify their investments and take returns higher |
| Aggressive hybrids can be used for asset reallocation when equity fund investors want to reduce exposure to equity without losing on returns | Conservative hybrids can be used for asset reallocation when debt fund investors want to reduce exposure to debt without losing on risk control |
| Aggressive hybrid funds can be a good bet for long term planning with managed risk | Conservative hybrid funds can be a good bet for wealth conservation in the short run |
Are the tax implications of aggressive and conservative funds the same?
There are some very subtle differences in the tax treatment of conservative hybrid funds and aggressive hybrid funds. This table should answer these questions.
| Taxation Point | Aggressive Hybrids | Conservative Hybrids |
| Classification of LTCG | They are classified as equity funds so more than 1 year holding becomes LTCG | They are classified as debt funds so more than 3 years holding becomes LTCG |
| Taxation of LTCG (Long term capital gains) | Since they are classified as equity, LTCG is tax free up to Rs.1 lakh per annum. Above that it is taxed at 10% flat. | Since they are classified as debt, it is taxed at a lower rate of 20% with cost indexation benefits |
| Taxation of STCG (Short term capital gains) | Since they are classified as equity, STCG is taxable at a concessional rate of 15% on the gains made | Since they are classified as debt, it is included in total income and taxed at the normal rates applicable |
How to decide on allocation to aggressive hybrids?
Hybrids are a method of auto allocation. If as an investor, you are comfortable doing your own allocation between equity and debt, then hybrid funds are not required. However, if you want the fund manager to do the allocation then Hybrid funds can be an answer. You can opt for aggressive hybrids or conservative hybrids based on your investment objective and waiting period.
Are there downside risks to hybrid funds? There is a practical concern. Equity and debt fund management are very different ball games altogether. They need different mindsets and different skill sets. Whether it can be managed by a single fund manager is open to debate. However, if you look at the mutual fund flows, then Aggressive Hybrid funds are becoming quite popular in India.