Hybrid funds work in the grey area between pure equity and pure debt funds. There are many ways to create a hybrid scheme which leverages investment opportunities in both the asset classes. Most hybrid funds vary the percentage of funds allotted to equity to achieve the fund’s objectives. However, to create a clear demarcation between a balanced hybrid fund with up to 60% exposure to equity and those with a higher exposure, SEBI created a new hybrid fund category called Aggressive Hybrid Fund. Here, we will explore the Aggressive Mutual Funds and talk about some important things that you need to know about them.
What are Aggressive Mutual Funds?
Aggressive Mutual Funds are hybrid funds which invest between 65 and 80% of their total assets in equity and equity-related instruments and the balance 20-35% in debt securities and money market instruments. Usually, hybrid funds with a balanced approach are not permitted to take advantage of any arbitrage opportunities even if the fund manager is certain of making good returns.
Arbitrage is the process of buying a security in one market at a lower price and selling it in another market at a higher price. The aim is the gain from the difference in price.
Most Aggressive Mutual Funds offer a much higher autonomy to the fund managers as compared to balanced funds. Therefore, Aggressive Funds can take advantage of arbitrage opportunities. Further, the fund manager can opt to follow the growth or value investing style while selecting stocks. Also, while selecting debt securities, the fund manager has the option to choose between securities with varying sensitivity to changes in interest rates.
Who should invest in Aggressive Funds?
Aggressive funds endeavour to generate regular income along with long-term wealth generation by using a hybrid portfolio. Many investors consider aggressive funds to be riskier than the standard balanced hybrid funds. In these funds, the fund manager primarily invests in equity and equity-related instruments while allocating a smaller portion to debt for stability. Therefore, investors with moderate risk tolerance and an investment horizon of at least 5 years can consider Aggressive Funds.
It is also important to note that the risks associated with an aggressive fund also depends on the selection of small/mid-cap stocks. Hence, it is important to analyze the portfolio of the scheme carefully before investing.
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Factors to consider before investing in Aggressive Mutual Funds in India
Here are some important aspects that you must consider before investing in aggressive funds in India:
Assess the Risks and Returns
With 65-80% equity allocation, Aggressive Funds are considered to be moderately-high risk investments. With a 20-35% exposure to debt securities and money market instruments, the risks associated with aggressive funds are lower than those of a pure equity fund. Also, the presence of small-cap stocks in the equity portfolio or low-quality debt securities can further increase the risk of investment. Returns are proportionate to the choice of stocks and securities in the portfolio.
Aggressive funds also charge a fee for the fund management services offered by them. This is known as an expense ratio. A higher expense ratio can eat into your profits. Hence, you must look for schemes with low expense ratios. Further, if the scheme has a high trading activity, then the expense ratio will be high due to increased costs. Keep this factor in mind while selecting a scheme.
Selecting the right Aggressive Fund
Before you start looking at the different aggressive funds available, it is important to assess your financial goals, risk tolerance, and investment horizon and create an investment plan. This will allow you to choose the scheme which works with the rest of your investment portfolio for fulfilling your dreams.
Aggressive Fund Taxation
For taxation purposes, Aggressive funds are treated similar to equity funds with the following tax rules:
- Long-term capital gains (LTCG) of more than Rs. 1 lakh are taxed at 10% without indexation
- Short-term capital gains (STCG) are taxed at 15%