Mutual funds, known as aggressive hybrid funds, invest primarily in stocks and a small amount in debt instruments.
These funds are allowed a maximum equity exposure of 75% with a minimum 25% investment in FD-like securities.
Aggressive hybrid funds are less hazardous than pure equity funds thanks to this method of diversifying the investment.
Additionally, over time, they might be able to provide returns that are comparable to equity funds.
Who Should Invest in Aggressive Hybrid Funds?
- Intermediate equity investors: Investors who wish to begin investing in equities but do not want the level of risk associated with pure equity funds might consider these funds. In times of market downturn, the debt component guarantees that the investment value doesn’t fall as far as pure equity funds.
- Investors with a 3-5 years Investment Horizon: You must have a modest to long-term investment horizon for these funds because most of the invested capital is placed in stocks. Ideally, you may invest in these funds for the financial objectives that will be reached in the next three to five years. It will enable the fund to reach its full potential and help you achieve your financial goals.
- Investors a few years from retirement: A good place to start building a retirement corpus for investors close to retirement age but who haven’t saved enough is by investing in aggressive hybrid funds.
Things to know before investing in Aggressive Hybrid Funds
Risk: Compared to pure equities mutual funds, aggressive hybrid funds are less dangerous. However, due to the significant equity component, they carry a somewhat high risk. As a result, when the market corrects, the value of your investment will decline, but not as much as a pure equities mutual fund.
Returns: These products will perform worse than pure equity funds in a rising market. This is because you invested money that was split between equity and debt securities. These instruments offer lower returns since they are less risky than equity. Long-term, however, there isn’t a significant performance difference between these products and pure equities funds.
Financial Objectives: These funds are suitable for your medium-term objectives, such as saving money for a car purchase or vacation. However, because you are taking on a sizable amount of equity exposure, be aware that you may need to adjust your goal’s timeline if markets are correct in the interim or remain unchanged.
Cost: Aggressive hybrid funds charge an annual fee to give you fund management services, just like any other mutual fund plan. A higher expense ratio reduces the fund’s profitability. Choose a fund for your investments by focusing on one with a lower expense ratio. As a result of a lower expense ratio, choosing the fund’s direct plans may result in larger returns than the ordinary plan.
Taxation on Aggressive Fund
For taxes purposes, aggressive hybrid funds are classified as equity funds.
When fund units are redeemed within a year, capital gains are recognised as short-term capital gains (STCG) and are subject to a 15% tax.
Long-term capital gains (LTCG), which are gains made after holding investments for more than a year, are tax-free for the first Rs. 1 lakh of gains. Payments over Rs. 1 lakh are subject to a 10% tax.
An investor’s income will be increased by dividend gains received from these funds, which will then be taxed in accordance with the investor’s income tax bracket. However, TDS is applicable if these gains exceed 5000.
Conclusion
Comparing aggressive hybrid funds to pure equity funds may be marginally less risky. The risk in an aggressive hybrid fund will only extend to the portion invested in stocks if the market declines and equities suffer. The portfolio’s debt portion would soften the impact.
You must examine a fund from several perspectives while choosing one. Depending on your needs, aggressive hybrid funds can be determined using a variety of quantitative and qualitative characteristics. Your financial objectives, level of risk tolerance, and investment horizon should also be considered.
