Given the fact that the benchmark Nifty has risen over 14% from its mid-June low, investors should be cautious as a potential peak could be just around the corner. They can now look at aggressive hybrid funds to make the most of the equity market opportunity and keep a smaller percentage of exposure to fixed income in case of severe market volatility.
As the risk in such funds is lower compared to pure equity funds, they are suitable for those who do not want to take too much market-related risks. Experts suggest aggressive hybrid funds can be used for financial goals which would come within five to seven years.
Equity, debt mix
In aggressive hybrid funds, asset management companies invest up to 80% of the portfolio in equities and the rest in debt. This helps the investor in asset allocation and diversify the assets across equity and debt. At the time of market volatility, fund managers rebalance the asset allocations to generate higher risk-adjusted returns.
For long-horizon investors seeking to avoid equity-related risks, aggressive hybrid funds are an ideal option. Harshad Chetanwala, co-founder, MyWealthGrowth.com, says the allocation in debt does the job of reducing the risk. “The fund manager will rebalance the fund’s portfolio based on their views on the economy and the stock market, hence you need not worry much about rebalancing your portfolio between equity and debt,” he says.
An aggressive hybrid fund can invest up to 80-85% in equity, a fund manager can sometimes take a call of having a larger exposure to equity because he knows that in hybrid funds the investor is looking for a mix between equity and fixed income. Therefore the stance of the fund manager for a higher exposure in equity is what contributes to aggressive hybrid funds.
Santosh Joseph, founder and managing partner, Germinate Investor Services, says investors should look for the previous track record of the fund manager and see how he has alternated between high equity exposure to a low equity exposure. Secondly, investors should get a generic sense of whether the market is looking good or expensive in terms of valuation. Hybrid funds that are high into equity exposure could be a big draw down in case the market turns out to be extremely volatile. Investors should be invested in it for a longer time so that the market can go through the whole cycle.
What should you do?
As aggressive hybrid funds carry high risk, they are suitable for mid to long term investment. “Sometimes the volatility of these funds can be close to equity diversified funds. If the idea of investing in hybrid funds is to take less risk, then you can consider balanced advantage funds where the allocation in equity and debt will be based on market conditions,” says Chetanwala.
The exposure to equity or debt at many times will give the investor the upside benefit of the buoyant market or protect him from a volatile or a downward trending market.
“Without your active participation, an aggressive fund, both in terms of exposure to equity and debt, and the amount it switches between equity and debt ,will on an autopilot mode manage your asset allocation and help you manage your rebalancing,” says Joseph.
For taxation, these funds are treated as equity funds. So, the short term capital gains will be 15% on redemption before one year, and after one year will attract long-term capital gains at 10% for gains above `1 lakh. Even dividends earned from these funds will be taxed as per the individual’s income tax slab rate.
For long-term investors seeking to avoid equity-related risks, aggressive hybrid funds are an ideal option
Experts suggest aggressive hybrid funds can be used for financial goals which would come within five to seven years
Check the fund manager’s track record to see how he has alternated between high equity exposure and low equity exposure
For taxation, these funds are treated as equity funds