Why aggressive hybrid mutual funds could boost your long-term wealth
Aggressive hybrid funds mix equity and debt in one portfolio with the aim to deliver high growth with a cushioning of stability. For risk-takers who make prudent bets, they can be a powerful wealth-building tool.
What are aggressive hybrid funds? Aggressive hybrid funds invest a significant portion of their corpus in equities—typically between 65 to 80 percent of the fund—and the remaining part in debt instruments. The holding in equities creates capital appreciation, and the debt holding generates income and reduces volatility. This mix gives them the tax benefit of equity funds but with slightly lower risk than in pure equity plans.
2/6
How they generate returns The equity component of such funds invests in large-cap, mid-cap, and sometimes small-cap stocks that generate long-term growth. The debt component comprises government securities, corporate bonds, or money market instruments yielding periodic income. During the bull run, equity exposure provides high returns, whereas during a fall, the debt component saves the loss, and the investor has a smoother ride compared to vanilla equity investment.
3/6
Who should invest in them Aggressive hybrid funds are suitable for those investors who have a moderate- to high-risk tolerance and wish to have long-term growth but with some protection on the downside. They are ideal for those investors who are starting their equity journey and wish to mix risk with stability. The minimum investment horizon of three to five years is required to weather market cycles successfully.
4/6
Most critical for investors These money are diversified in a single product, and they reduce the requirement of investors having separate equity and debt portfolios. They are taxed on par with equity, and long-term capital gains above ₹1 lakh are taxed at 10 percent without indexation, and they are more tax-efficient than most debt-based products. The inherent equity and debt rebalancing by fund managers diminish the requirement of market timing by investors.
Risks to recall Despite their balanced approach, aggressive hybrid funds are not free of risks. Market downturns can lead to temporary losses, and the performance of the debt component is fluctuating on the basis of interest rate movements and credit quality. Investors must be prepared for volatility and not consider the funds risk-free substitutes for fixed deposits or conservative debt funds.
6/6
The bottom line Aggressive hybrid mutual funds are a compromise between growth and stability and are a suitable addition for long-term wealth creation. With equity for returns and debt for stability, they help the investor weather the market fluctuations in a better manner. For investors who can stay invested for a few years, they are an efficient way of getting maximum returns without taking all the risk of equities.
