What are Hybrid Funds?
Mutual fund types that invest in more than one asset class are called hybrid funds. Typically, they consist of a combination of equity and debt assets, and occasionally gold or even real estate. Asset allocation, correlation, and diversification are the guiding principles behind hybrid funds. Asset Allocation is the act of selecting how to distribute the money among various asset classes, correlation is the co-movement of the returns of the assets, and diversification is having multiple assets in a portfolio. Since the sources of risk and factors impacting returns for investment options within an asset class are comparable, they tend to display a high level of correlation in returns, whereas investment options across asset classes exhibit less correlation in returns.
By mixing assets with low correlation, portfolio risk can be decreased. Diversifying investments across several asset classes, hybrid mutual fund schemes seek to maximise returns while minimising risk. The allocation to each asset class is determined by the fund manager based on the investment objective and market conditions of the fund.
Types of Hybrid Funds
- Multi-Asset Allocation Fund: These Multi Asset Allocation Fund schemes must contain investments in at least three asset classes, with at least 10 percent allocated to each asset class. The asset allocation of these funds is determined by the fund management based on his or her assessment of the optimal asset allocation.
- Balanced Hybrid Funds: These strategies invest between 40 and 60 percent in both stock and debt asset classes. The goal is to achieve long-term capital growth by investing in the equities asset class and to mitigate risk through debt allocation. Arbitrage is prohibited in this class of schemes.
- Aggressive Hybrid Funds: These schemes are required to invest between a minimum of 65% and a maximum of 80% in equity assets and between 20% and 35% in debt assets. Through the minimal allocation to debt, they offer the potential for significant returns with less risk. They enjoy the tax treatment relevant to equity-oriented strategies.
- Balanced Advantage Fund: These Balanced Advantage Fund schemes are fully dynamic and can switch from a 100% debt asset class to a 100% equity asset class. The asset allocation is determined based on the suggestion of the fund’s financial model. These funds are appropriate for investors that desire automated asset allocation. These funds are required to invest 10 to 25% of their total assets in equities and equity-related products. The remaining seventy-five to ninety percent will be invested in debt securities. The objective of these funds is to produce income from the portfolio’s debt component and to use the minor equity component to boost the overall return. It is a suitable alternative for those seeking debt plus returns and who are willing to assume a moderate amount of risk.
- Equity Savings Fund: These equity savings funds invest in stocks, derivatives, and debt in an attempt to strike a balance between risk and return. Derivatives limit directional stock exposure, minimising volatility and generating a consistent return. The equity asset generates growth and debt, while the derivative delivers stable returns on a consistent basis. These schemes invest between 65% and 100% in equity assets and between 0% and 35% in debt asset classes.
- Arbitrage Fund: The arbitrage technique consists of buying on the cash market and selling on the futures market in order to create profits from the price difference between the two marketplaces. This is accomplished by using derivative instruments, which are classified as equity-oriented products. Since there is no directional call on the stock, it is not subject to the volatility of the equity asset class and offers a consistent return similar to that of debt. These arbitrage fund schemes invest between 65% and 100% in equity assets and between 0% and 35% in debt asset classes. This fund is appropriate for low-risk investors seeking to obtain debt-like returns with equity taxes during periods of extreme market volatility.
What are Aggressive Hybrid Funds?
Mutual funds that invest in both equity and debt assets are referred to as aggressive hybrid mutual funds. The equity exposure is greater than that of debt funds. SEBI requires aggressive hybrid funds to invest between 65 and 80 percent of their total capital in equities and equities-related products. Additionally, debt allocation ranges from 20% to 35%. Individuals can invest in aggressive hybrid funds via SIP or lump sum.
The returns on these funds are higher than those of pure debt funds because of their considerable exposure to equity investments. Additionally, the risk linked with the funds is increased. In a favourable market environment, these funds can generate substantial returns. Conversely, when market conditions are unfavourable, the tables might turn. Therefore, these funds are investments with somewhat high risk.
In addition, the fund manager of the fund house plays a significant role in these funds. The fund management is free to determine the investing strategy. They discover arbitrage opportunities and invest in them to create huge returns. In addition, the variety of stocks ranges from value to growth.
Therefore, the selection of the fund manager’s experience and competency has a significant impact on the returns.
These funds are classified as equity funds. Therefore, they are taxed like equity mutual funds. For holding periods of less than one year, capital gains are taxed at a rate of 15% (plus 4% surtax). For holding periods longer than one year, gains in excess of INR 1,00,000 per year are taxed at the Long-Term Capital Gains rate of 10% (plus 4% cess). In addition, beginning in fiscal year 2020-21, investors will be taxed on dividends at the rate applicable to their income tax bracket. In addition, dividends over INR 5,000 are subject to a 10% TDS. In addition, investors selling units of equity funds are subject to a securities transaction tax (SST) of 0.001%.
How do Aggressive Hybrid Funds Work?
Open-ended aggressive hybrid mutual funds are equity-focused hybrid schemes. They invest mostly in equity and equity-related products. Hybrid funds that are aggressive have the freedom to invest in market arbitrage opportunities. When a fund manager is able to purchase a security at a low price in one market and sell it at a higher price in another market, he has profited from an arbitrage opportunity. When a fund manager takes advantage of price disparities in two markets for the same security, this is known as arbitrage.
When picking stocks for the portfolio, the portfolio manager of aggressive hybrid funds might choose between growth and value investing styles. Alternatively, while selecting debt instruments, customers can invest in both short- and long-term papers, as well as papers with different interest rate sensitivity.
The majority of an aggressive hybrid fund’s portfolio consists of equity assets, which generate the majority of its returns. The debt portion of the portfolio provides the portfolio with stability. However, as stock is the fund’s primary asset, it is susceptible to market changes. The debt securities represent a negligible fraction of the portfolio and are incapable of stabilising the unpredictable markets.
Individuals can invest in aggressive hybrid funds via SIP or lump money. Using online return calculators, investors can compute their SIP returns and lump-sum returns.
Who Should Invest In Aggressive Hybrid Funds?
These funds are an ideal addition to the portfolios of both novice and seasoned investors.
- First-time investor
These funds are appropriate for investors who wish to begin investing in Equities but do not desire the amount of risk associated with pure equity funds. The debt component assures that, during market declines, the value of the investment will not fall as substantially as it would with pure stock funds.
- Investors with an investment horizon of three to five years.
These funds invest the majority of their assets in equities; hence, a moderate to long-term investment horizon is required. Ideally, you should invest in these funds for short- to medium-term financial objectives. It will enable the fund to attain its full potential, allowing you to reach your financial objectives.
- Investors nearing retirement age.
If an investor is nearing retirement age and has not yet saved enough for a retirement corpus, then investing in an aggressive hybrid fund may be a suitable option.
Factors To Consider Before Investing In Aggressive Hybrid Funds in India
Before investing in aggressive funds in India, you should carefully evaluate the following factors:
- Risk.
With an equity allocation of 65-80%, Aggressive Funds are relatively high-risk investments. The risks associated with aggressive funds are lower than those of a pure equity fund due to their exposure to debt securities and money market instruments. Additionally, the presence of small-cap equities in the equity portfolio or low-quality debt securities might enhance investment risk. Returns are proportional to the portfolio’s selection of stocks and securities.
- Expense Ratio.
Additionally, aggressive funds charge a fee for their fund management services. This is referred to as the expense ratio. A larger spending ratio might reduce profits. Therefore, you must seek out plans with modest expenditure ratios. In addition, if the scheme has a high volume of trading, the expenditure ratio will be elevated due to increasing costs. Consider this element when selecting a scheme.
- Investment Objective
Before looking at the various aggressive funds available, you should evaluate your financial objectives, risk tolerance, and investment horizon and develop an investing plan. This will enable you to select the strategy that complements the rest of your financial portfolio in order to realise your goals.
- Taxation
With the following tax guidelines, aggressive funds are considered similar to equity funds for tax purposes: Over Rs. 1 lakh, long-term capital gains (LTCG) are taxed at 10% without indexation.
15% of short-term capital gains are taxed.
List of Best Performing Aggressive Hybrid Funds (as per 5-Year return)
| Scheme | 5-Year Return | AUM (Cr) |
| Quant Absolute Fund | 19.88% | 661.86 |
| ICICI Prudential Equity & Debt Fund | 14.34% | 19,792.96 |
| Baroda BNP Paribas Aggressive Hybrid Fund | 13.41% | 759.47 |
| Kotak Equity Hybrid Fund | 13.29% | 2,921.43 |
| Canara Robeco Equity Hybrid Fund | 12.72% | 8,081.04 |
Source: AMFI (data as on 28/09/2022)
Closer Look At Top Agressive Hybrid Funds (as per 5-Year CAGR – as on 30 th September 2022)
- Quant Absolute Fund
Quant Absolute Fund Direct-Growth is an Aggressive Hybrid mutual fund. This fund has existed for nine years and eight months, having been established on January 1, 2013. As of 28 September 2022, Quant Absolute Fund Direct-Growth has INR 661 Crores in assets under management (AUM) and is a minor fund within its category. The fund’s expense ratio of 0.56% is lower than the expense ratios of the majority of aggressive hybrid funds. The current allocation of the fund is 79.28% stock and 11.54% debt.
The returns for the Quant Absolute Fund Direct-Growth over the past year were 12.07%. Since its inception, it has generated average yearly returns of 17.74%. Every three years, the fund has doubled the money invested in it.
- ICICI Prudential Equity & Debt Fund
ICICI Prudential Equity & Debt Fund Direct-Growth is an Aggressive Hybrid mutual fund programme. This fund has existed for nine years and eight months, having been established on January 1, 2013. As of 28 September 2022, ICICI Prudential Equity & Debt Fund Direct-Growth has INR 19,792 Crores in assets under management (AUM) and is a medium-sized fund within its category. The expense ratio of 1.21 percent is greater than the expense ratios of the majority of aggressive hybrid funds. The current allocation of the fund is 66.12% equities and 18.90% debt. The one-year returns for the ICICI Prudential Equity & Debt Fund Direct-Growth were 7.40%. Since its inception, it has generated average yearly returns of 16.33%. Every three years, the fund has doubled the money invested in it.
- Baroda BNP Paribas Aggressive Hybrid Fund
Baroda BNP Paribas Aggressive Hybrid Fund Direct – Growth is a mutual fund plan offered by Baroda Bnp Paribas Mutual Fund. This fund has existed for five years and six months, having been established on March 17, 2017. As of 28 September 2022, Baroda BNP Paribas Aggressive Hybrid Fund Direct – Growth has INR 759.47 Crores in assets under management (AUM) and is a medium-sized fund within its category. The fund’s expense ratio of 0.62 percent is lower than the expense ratios of the majority of aggressive hybrid funds. Currently, the fund is 75.71% invested in equities and 21.95% invested in debt.
Last year, the Baroda BNP Paribas Aggressive Hybrid Fund Direct – Growth returned -0.83%. Since its inception, it has generated average yearly returns of 13.20%.
- Kotak Equity Hybrid Fund
Kotak Equity Hybrid Fund Direct-Growth is a mutual fund plan from Kotak Mahindra Mutual Fund that invests in aggressive hybrid stocks. This fund has existed for seven years and ten million dollars since its inception on November 1, 2014. As of 28 September 2022, Kotak Equity Hybrid Fund Direct-Growth has INR 2,921 Crores in assets under management (AUM) and is a medium-sized fund in its category. The fund’s expense ratio of 0.62 percent is lower than the expense ratios of the majority of aggressive hybrid funds. Currently, 72.47% of the portfolio is allocated to equities and 17.48% to debt.
The 1-year returns for the Kotak Equity Hybrid Fund Direct-Growth were 3.95 percent. Since its inception, it has generated average yearly returns of 13.34%. Every three years, the fund has doubled the money invested in it.
- Canara Robeco Equity Hybrid Fund
Canara Robeco Mutual Fund’s Canara Robeco Equity Hybrid Fund Direct-Growth is an aggressive hybrid mutual fund. This fund has existed for nine years and eight months, having been established on January 1, 2013. As of 28 September 2022, Canara Robeco Equity Hybrid Fund Direct-Growth has INR 8,081 Crores in assets under management (AUM) and is a medium-sized fund within its category. The fund’s expense ratio of 0.59% is lower than the expense ratios of the majority of aggressive hybrid funds. Currently, the fund has a 71.98% stock exposure and a 19.79% debt position.
The one-year returns for the Canara Robeco Equity Hybrid Fund Direct-Growth were -1.69 percent. Since its inception, it has generated average annual returns of 14.20%. Every six years, the fund has quadrupled the money invested in it.
FAQs
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Where do Aggressive Hybrid Fund Invest?
According to SEBI, Aggressive Hybrid Fund has to invest 65% to 80% investment in equity & equity related instruments; and 20% to 35% in Debt instruments.
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