What is Aggressive Hybrid Fund – Meaning, Benefits & How it Works?

Aggressive hybrid funds are mutual funds that invest in a combination of equities and fixed-income securities, with a significant portion allocated to equities to generate higher returns. These funds are designed for investors who seek the growth potential of equities while benefiting from the stability of fixed-income assets. They balance risk and return by diversifying across asset classes. While they can provide higher returns than traditional hybrid funds, they also carry higher risk due to equity exposure. 

This article covers aggressive hybrid funds, their characteristics, and why they could be suitable for some investors.

What Are Aggressive Hybrid Funds?

Aggressive hybrid funds are a category of mutual funds that invest in both equity and debt instruments. The main goal of such funds is to achieve greater yields through a sizeable investment in equities and the balance part put into fixed-income instruments like bonds. Aggressive hybrid funds generally have 65%-80% invested in equity and balance through debt instruments. This kind of investing aims to provide long-term growth with risk managed using the debt component.

Features of Aggressive Hybrid Fund

1. Equity and Debt Mix: Aggressive hybrid funds maintain significant exposure to equities (usually 65-80%), with the remaining portion invested in debt instruments. This provides an opportunity for capital appreciation while offering a level of stability.

2. Higher Risk, Higher Return: Since the funds are more equity-oriented, they tend to be more volatile than the conservative hybrid funds and hence potentially may give higher returns. But the risk is higher too, because equity markets are volatile.

3. Diversification: These funds invest in a mix of equity stocks and debt securities. This gives diversification across asset classes. In other words, risk can be reduced by spreading investments in different types of securities.

4. Suitability: These types are suitable for investors willing to invest in high volatility to secure higher returns. Since their portfolios have significant equity exposures, aggressive hybrid funds are even more volatile than their conservative or balanced counterparts.

5. Tax Benefits: Aggressive hybrid funds qualify for long-term capital gains tax benefits if held for more than three years. The returns are taxed at a lower rate compared to short-term investments.

Types of Aggressive Mutual Funds

Aggressive mutual funds can be categorized into different types based on their investment strategies and asset allocation. Some of the common types of aggressive mutual funds include:

• Equity-Oriented Hybrid Funds: These funds allocate more towards equities, say 65-80%, and they are looking for capital appreciation with the help of risk management through fixed income.

• Dynamic Asset Allocation Funds: These funds are adjusted with equity-debt allocation per market conditions, where it will increase or decrease the equity exposure per the economic environment.

How does an Aggressive Hybrid Fund Work?

An aggressive hybrid fund works on the principle of investing the major portion of its assets in equities, which holds a lot of potential for capital appreciation. The remaining portion of the fund is kept in debt instruments to ensure stability and reduce the overall volatility of the portfolio. The fund manager closely observes the market trend and might change the composition of the fund between equity and debt securities depending on the prevailing market conditions and investment objectives of the fund.

The equity portion of this fund is always invested in large-cap, mid-cap, or small-cap stocks that depend on the risk profile of the fund. There is an allotment for the debt portion of the fund made to government bonds, corporate bonds, or money market instruments. A combination that would balance an aggressive portfolio in a manner and would be quite safe by giving the advantage of growth to the extent of stocks as well as what can be drawn from the two.

Who Can Invest in Debt Funds?

Aggressive hybrid funds are suited for investors with higher risk appetite and those looking to create long-term wealth. The following are the ideal investment categories for aggressive hybrid funds:

• With a long-term horizon, these investors can afford to take greater risks and enjoy the capital appreciation of equities.

• Those investors are willing to assume some level of volatility yet want to conserve capital by investing in debt.

• Retirement Planning Aggressive hybrid funds can be a great option for wealth accumulators seeking to make huge growth over the long term.

• Diversification Investors searching for a perfect mix of growth and stability can look at these funds as the best way to diversify their portfolio.

Why Invest in Aggressive Hybrid Funds?

They tend to have a large equity component that gives them significant potential to produce high returns in the long term. For aggressive hybrid funds, higher growth is suited for growth-seeking investors who can also take care of fluctuating markets.

A balanced approach to risk: This combination of equities and debt instruments balances the higher risk from equities with relative stability in debt securities, making aggressive hybrid funds less volatile than pure equity funds while offering higher returns than traditional fixed-income investments.

Diversification: By investing in both equities and debt instruments, these funds provide diversification across asset classes, which can help mitigate the overall risk. Investors can benefit from the growth of equities while also enjoying some stability through debt investments.

Long-term tax advantage: If held for more than three years, aggressive hybrid funds are eligible for long-term capital gains tax benefits. The tax treatment is better than that of short-term investments, and investors can maximize their returns over time.

Flexibility: Aggressive hybrid funds provide the flexibility for investors to diversify across various market segments that can be adjusted to respond to the changing market conditions. The fund manager can actively change the equity-debt allocation to maximize the returns.

Taxation Rules of Aggressive Mutual Funds

Aggressive hybrid funds are taxed according to the following rules:

Conclusion

Aggressive hybrid funds are excellent investment options for investors looking at balancing risk and return. This is because they expose higher growth potential through equity while maintaining stability through the use of debt instruments. They are ideal for long-term investors with a higher risk threshold who aim to gain through capital appreciation. Even though they provide diversification as well as favorable tax treatment, investors need to be very aware of the risks attached and whether their goals tally with the strategy that such a fund would undertake.

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