Aggressive hybrid funds gave an average return of around 15.41% in the last three years. JM Aggressive Hybrid Fund, the topper in the category, gave 24.43% return in the said period, followed by ICICI Prudential Equity and Debt Fund which gave 23.15% return. PGIM India Hybrid Equity Fund gave the lowest return of around 9.41% in the similar time frame.
Multi asset allocation funds gave an average return of around 15.58% in the above mentioned period. Quant Multi Asset Fund, the topper and the oldest fund in the category, gave 22.33% return in the last three years. ICICI Prudential Multi-Asset Fund, the largest fund in the category based on assets managed, gave 22.02% return. Motilal Oswal Multi Asset Fund gave the lowest return of around 8.28%.
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Now, the question arises: what factors contributed to this performance?
Aggressive hybrid funds
“The performance of aggressive hybrid funds has been driven by several key factors. Firstly, the robust growth in equity markets has played a significant role, as these funds typically allocate over 70% of their assets to stocks against the minimum requirement of 65%, allowing them to benefit from the market’s upward momentum. Secondly, strategic investments in midcap and small-cap stocks have significantly boosted returns. Additionally, effective stock selection and smart debt management have further enhanced the overall performance of these funds, enabling them to outperform benchmarks,” mentioned Sagar Shinde, VP Research, Fisdom.
Another expert believes that growth in equity markets and with Sensex reaching from 25,000 in March 2020 to now at 80,000 have helped these funds offer better returns. Also, the increase in interest rate helped in better returns for the debt component.
“Aggressive hybrid funds performance was very good in the last three years as equity, which is a minimum of 65% in this category, has done very well post-pandemic. The broader large-cap index like the Sensex was just about 25,000 in March 2020 and is now at 80,000. Also, the increase in interest rates helped in better returns for the debt component in aggressive hybrid funds,” said Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance.
Multi asset allocation funds
“Multi-asset allocation funds also have commodities, other than debt and equity. The current cycle has been unusual, as gold prices also went up during this period along with the increase in equity and debt. Generally, equity and gold are inversely related as we witnessed during the pandemic, but now the gold prices have also gone up considering the Worldwide geopolitical situations and the weakening of the rupee against the dollar,” mentioned Minocha.
“The strong performance of the multi-asset category can be attributed to several key factors. Firstly, the diversified asset allocation within these funds, typically including a mix of equities, bonds, and other asset classes like commodities or real estate, has enabled them to capitalize on positive trends across different markets. For instance, the simultaneous rally in equity markets and gold prices has significantly boosted returns,” said Shinde.
He further added, “Additionally, the ongoing economic normalization post-pandemic has created a more conducive environment for these funds, with growth and inflation rates beginning to stabilize. Moreover, fund managers have effectively enhanced performance by dynamically adjusting portfolios in response to various market conditions, such as geopolitical events, potential interest rate cuts, and changing valuations, thereby optimizing returns in a volatile environment.”
Talking about the taxation, aggressive hybrid funds are taxed as equity funds whereas multi-asset allocation funds are taxed as debt funds.
In the union budget announcement, there was an increase in capital gain tax for equity mutual funds. The short-term gains on specified financial assets was changed to 20% instead of the previous 15%. The long-term gains on all financial and non-financial assets was changed to 12.5% from 10% earlier.
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After the change in taxation structure, which category should investors choose at the current point of time?
“While most multi-asset allocation funds are taxed as debt funds, there can be funds that are taxed as equity. They could invest in arbitrage to qualify for equity taxation. Equity taxation is an advantage for those who are in the tax bracket of 30% and beyond as the maximum tax would be 20% for less than one year of holding and 12.5% for greater than one year of holding. There are no taxes for long-term capital gains up to Rs 1.25 lakhs a year. However, in the case of debt-based taxation funds, the tax structure will be based on the tax slab now, more so, since the indexation benefit has also been removed in the last budget,” recommends Rajesh Minocha.
The other expert recommends that the decision to choose the correct category for investment should be based on the investor’s financial goal, with taxation being a secondary consideration rather than being the primary factor.
“Investors should prioritize their investment objectives and risk tolerance rather than focusing solely on tax implications when choosing between Aggressive Hybrid and Multi-Asset Allocation funds. For those looking to diversify across various asset classes—such as REITs, gold, silver, international equity, domestic equity, and debt—Multi-Asset Allocation funds are a suitable choice. While a few multi-asset funds are taxed as debt, it’s important to note that some, like those offered by ICICI and many others, are taxed as equity, so investors should verify the specific tax treatment of the fund they are considering,” recommends Shinde.
“Aggressive Hybrid Funds are better suited for investors who want a higher exposure to domestic equities while maintaining some allocation to debt. These funds, taxed as equity, offer a tax advantage for long-term investors but come with less flexibility in asset allocation compared to Multi-Asset Allocation funds. Therefore, the decision between these two categories should be guided by the investor’s financial goals, with taxation being a secondary consideration rather than the primary deciding factor,” he added.
In the last one year, aggressive hybrid funds and multi asset allocation funds have offered an average return of around 30.80% and 25.67% respectively. These schemes gave returns up to 50.97% which was offered by JM Aggressive Hybrid Fund, an aggressive hybrid fund.
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Looking at the current performance, are you willing to make an investment in these categories? What is the outlook for these funds?
An expert recommends that the outlook for both categories is positive mainly due to strong macroeconomic factors in India. He also says that as the Indian economy continues to show resilience and growth, equities as an asset class are expected to perform well, benefiting both these fund categories.
Aggressive hybrid funds
“Aggressive Hybrid Funds are likely to capitalize on this growth due to their significant exposure to domestic equities. These funds are expected to generate strong returns in a favorable equity market environment. However, they may experience higher volatility since they are primarily focused on equities with a smaller allocation to debt,” said Shinde.
“The outlook for aggressive hybrid funds is good if an investor has a time horizon of less than 3 to 4 years. This investment should not be put into equity funds completely as it will be subject to market risk. However, an investor should choose this category based on his risk-taking appetite, else there are funds like balanced advantage or dynamic asset allocation funds that can also have the same structure, but the composition between equity and debt is dynamically managed by the fund manager,” said Minocha.
He also adds, “The returns in these categories whether aggressive hybrid or dynamically managed are very high currently and the investor should tone down his return expectation, as the euphoria in the markets settles. This kind of return will still be very good as it could comfortably beat inflation post-taxation, for such low-tenure products, as compared to the other financial products available in the market.”
Multi asset allocation funds
“Multi-Asset Allocation Funds, on the other hand, also stand to benefit from the positive equity outlook but with the added advantage of reduced volatility. This is because these funds diversify their investments across multiple asset classes, such as gold, debt, and sometimes real estate, international equities in addition to domestic equities. The flexibility in asset allocation allows fund managers to dynamically adjust the portfolio, helping to smooth out the volatility that might affect more equity-heavy funds like Aggressive Hybrid Funds,” said Shinde.
Minocha said, “The multi-asset allocation funds have a good outlook for the future and provide a good diversification across at least three asset classes for the investor for such short tenure time horizons. However, the returns currently experienced by the investors are not realistic and the purpose of diversification is lost. All asset classes in this category have been going up and the correlation amongst them is not negative.”
He also mentions, “We should experience rationalisation of the returns in this category, but it will continue to be a superior product, as compared to other financial products for this time horizon. We may witness lower returns as compared to equity funds in a rising market scenario, but their significance for diversification should not be discounted, as we shall see their importance in the bear markets.”
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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