Why aggressive hybrid mutual funds are performing well?

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An investor may not always wish to pursue an excessively aggressive or conservative investment strategy to accomplish his financial objectives. In such instances, he may want to maintain a balance in his investment portfolio.

Investing in a hybrid mutual fund may be a better option for that kind of investor. If you want to achieve a better rate of return than a debt fund while maintaining a lower risk level than an equity fund, a hybrid fund may meet your investment objectives.

One such category, Aggressive Hybrid funds, has given much better returns than the rest of the five hybrid categories. Out of the six categories of hybrid mutual funds, Aggressive Hybrid funds have given a return of 17%,13%, and 13.4% in the last 3,5 and 10 years as of 27th October 2023, respectively.

Let’s understand why aggressive hybrid funds are doing better:

What are Aggressive hybrid funds?

As per Sebi guidelines, Aggressive hybrid funds invest 65% to 80% in equity and equity-related instruments and around 20% to 35% in debt instruments. These funds have low risk as compared to pure equity funds, but they offer similar like returns to equity mutual funds.

That said, when the markets are at high, these funds have the potential to generate the highest returns that can help investors to build a good corpus over the long-run. And when the markets are down, the debt component in aggressive hybrid funds provides a cushion and stability for the investors.

Taxation

Aggressive hybrid funds are considered as equity funds, and hence, the taxation is similar to it due to its high equity component. If you redeem before one year, returns are subject to a 15% tax. After a year, you must pay a 10% long-term capital gain tax on returns of Rs. 1 lakh or more in a fiscal year.

Should you invest?

Investors who have reached their financial goals and those with a moderate risk tolerance may want to think about switching from high-risk investments like small- and mid-cap funds to comparatively safer options like hybrid funds such as aggressive hybrid mutual funds.

As the equity markets are at their highest point, investors with a timeframe of more than three years should invest in these funds, as in the last three, the funds have delivered a return of 17% as of 27th October 2023.

Conclusion

In spite of global unpredictability, the Indian economy is outperforming other emergent and developed markets, lending credence to a bullish long-term outlook for India. That said, any financial products are not risk-free, and so is Aggressive hybrid funds.

In addition to debt components, aggressive hybrid funds also contain equity components, making them moderately high-risk investment options. The fund’s net asset value (NAV) is less volatile than that of pure equity funds. However, the presence of low-quality debt securities and small-cap equities may, however, increase the investor’s portfolio’s risk profile.

Therefore, it is essential to invest in aggressive hybrid funds depending on risk appetite and long-term goals. The help of a financial advisor is recommended if the investors are unsure whether to invest in such funds or not.