Mutual funds: bet on aggressive hybrid funds
With the benchmark Nifty index up more than 14% from its mid-June low, investors should be cautious as a potential spike could be imminent. They can now consider aggressive hybrid funds to make the most of equity market opportunities and retain a lower percentage of exposure to fixed income securities during high market volatility.
As the risk of these funds is lower than that of pure equity funds, they are suitable for those who do not want to take too much market risk. Experts suggest that aggressive hybrid funds can be used for financial goals that would occur within five to seven years.
Equity, debt mix
In aggressive hybrid funds, management companies invest up to 80% of the portfolio in equities and the rest in debt. This helps the investor in asset allocation and diversifies assets between stocks and debt. In times of market volatility, fund managers rebalance asset allocations to generate higher risk-adjusted returns.
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For long-term investors looking to avoid equity risk, aggressive hybrid funds are an ideal option. Harshad Chetanwala, co-founder of MyWealthGrowth.com, says spreading debt reduces risk. “The fund manager will rebalance the fund’s portfolio based on their views on the economy and the stock market, so you don’t have to worry much about rebalancing your portfolio between stocks and debt,” he says. .
An aggressive hybrid fund can invest up to 80-85% in equities, a fund manager can sometimes agree to have a greater exposure to equities because he knows that in hybrid funds the investor is looking for a mix between equities and fixed income securities. Therefore, the fund manager’s stance for higher equity exposure is what contributes to aggressive hybrid funds.
Santosh Joseph, founder and managing partner of Germinate Investor Services, says investors should research the fund manager’s track record and see how he alternated between high equity exposure and low equity exposure. Second, investors should have a general idea of how good or expensive the market is in terms of valuation. Hybrid funds with heavy exposure to equities could be a big downside if the market turns out to be extremely volatile. Investors should be invested in it longer so that the market can go through the whole cycle.
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What should you do?
As aggressive hybrid funds carry a high risk, they are suitable for medium to long-term investments. “Sometimes the volatility of these funds can be close to that of diversified equity funds. If the idea of investing in hybrid funds is to take on less risk, then you can consider balanced advantage funds where equity and debt allocation will be based on market conditions,” says Chetanwala.
Exposure to stocks or debt repeatedly will give the investor the benefit of a bullish market or protect him from a volatile or falling market.
“Without your active participation, an aggressive fund, both in terms of exposure to equities and debt, and the amount it switches between equities and debt, will run your asset allocation on autopilot mode and will help you manage your rebalancing,” says Joseph.
For tax purposes, these funds are treated as equity funds. So short term capital gains will be 15% on redemption before one year, and after one year it will attract long term capital gains at 10% for gains over 1 lakh. Even dividends earned on these funds will be taxed at the individual income tax slab rate.
For long-term investors looking to avoid equity risk, aggressive hybrid funds are an ideal option
Experts suggest aggressive hybrid funds can be used for financial goals five to seven years from now
Check the track record of the fund manager to see how he has alternated between high equity exposure and low equity exposure
For tax purposes, these funds are treated as equity funds