Understand the mandate
The Securities and Exchange Board of India (Sebi) mandates aggressive hybrid funds to invest 65-80 per cent in equity and equity-related instruments, and 20-35 per cent in debt securities. Equity dominates the mix. “The mandate combines the long-term wealth creation potential of equities with the stability of fixed income,” says Harshad Borawake, head of research and fund manager, Mirae Asset Mutual Fund.
Equity participation, downside protection
These funds offer meaningful equity participation. “Over the long term, they can deliver returns comparable to largecap equity funds with lower volatility,” says Alekh Yadav, head of investment products, Sanctum Wealth.
Debt cushions drawdowns, making falls shallower than in pure equity funds. “In choppy markets, the debt allocation can reduce the pressure investors feel when equities fall, helping them stay invested through difficult phases,” says Niharika Tripathi, head of products and research, Wealthy.in.
These funds get equity tax treatment because they maintain at least 65 per cent in equity. “Returns earned on the fixed-income component, therefore, become tax-efficient,” says Nilesh D Naik, head, PhonePe Mutual Funds. Gains on debt funds held separately are taxed at the investor’s marginal rate.
“The rebalancing in these funds also happens in a tax-efficient manner,” says Abhishek Singh, fund manager, DSP Mutual Fund. Separate equity and debt holdings need to be sold during rebalancing, which triggers tax liabilities.
Borawake points out that rebalancing imposes a buy-low, trim-high discipline that individual investors often struggle to execute.
Be prepared for volatility
Aggressive hybrid funds are equity-heavy products. “Given their minimum 65 per cent equity allocation, they can experience significant volatility,” says Naik.
During the January-March 2020 crash, they limited losses to about 25 per cent while the Nifty 50 fell roughly 38 per cent. “A 25 per cent fall is still a serious drawdown for an investor who expected a safe product,” says Tripathi. Debt can also be a drag on performance in equity bull markets.
Two funds within this category can have very different risk profiles. “One may run a largecap-oriented equity book, while another may take significant midcap and smallcap exposure,” says Borawake.
The debt portion also needs scrutiny. “A portfolio of high-quality instruments serves the purpose of providing stability better than one stretching for yield through lower-rated credit,” says Borawake.
They suit investors seeking equity participation without the full volatility of a pure equity fund. They can offer first-time equity investors a gentler entry into equities. Those seeking one professionally managed product that handles asset allocation may also consider them.
Tripathi cautions that investors must accept market-linked movement and treat debt as a cushion, not full protection.
Very conservative investors should be careful. Those uncomfortable with meaningful drawdowns may not be able to stay invested long enough. These funds may also not suit those with near-term goals. Self-directed asset allocators may not need them, according to Yadav.
Decide allocation carefully
Allocation should depend on risk appetite, investment horizon, and existing equity exposure. “Conservative investors may prefer a smaller allocation. Aggressive investors can use these funds for a meaningful portion of their equity exposure,” says Yadav.