Aggressive hybrid funds suit moderate-risk investors with long-term goals

Such funds are not entirely immune to volatility due to their considerable equity allocation

With markets being volatile over the past year, many investors are seeking solutions that combine the benefits of equity exposure for long-term wealth building while also mitigating volatility. Aggressive hybrid funds fit the bill well.

 

Over the past year, the Sensex has fallen 3.9 per cent, largecap funds have lost 5.2 per cent, and flexicap funds have declined 5.6 per cent. Aggressive hybrid funds have done a better job than the frontline index and diversified-equity categories by losing only 1.4 per cent.

 

“Markets have been quite volatile in the past year. Aggressive hybrid funds are better positioned to navigate such volatile and uncertain periods compared to pure equity funds. The allocation to fixed-income securities provides much-needed stability to the overall portfolio. Hence, their drawdowns are relatively less compared to equities,” says Harshad Borawake, head of research and fund manager, Mirae Asset Investment Managers (India).

 

“The fund structure of aggressive hybrid funds allows room for fund managers to actively manage the portfolio between equity (65–80 per cent) and debt (20-35 per cent). These funds are well-suited for volatile markets as they offer active portfolio rebalancing, reducing the overall risk of the portfolio,” says Ankur Punj, managing director and business head, Equirus Wealth. 

 

Asset allocation advantage

 

Diversification across asset classes is the hallmark of these funds. “Aggressive hybrid funds offer a good blend of equities and fixed income as they aim to balance returns and provide relative stability,” says Jayesh Sundar, fund manager, Axis Mutual Fund.

 

Their fund managers rely on dynamic asset allocation by transferring gains from equities to bonds, and vice versa, to stabilise the portfolio. “These funds do active portfolio rebalancing based on market conditions. Active fund management across equity and debt helps reduce portfolio risk and optimise returns,” says Punj.

 

They invest heavily in largecap equities and quality bonds. Their managers actively track the duration of bonds held in the debt portion.

 

Not immune to volatility

 

The 65-80 per cent equity exposure of these funds means they are not completely immune to market fluctuations. “Since they invest predominantly in equities, the drawdowns can still be higher (compared to fixed income and other hybrid categories) during significant market corrections,” says Borawake.

 

“These funds also tend to underperform pure equity funds in a structural market up-cycle,” says Sundar.

 

Suited for retirement

 

Investors having a moderate-risk profile can use these funds in their retirement portfolios. “If your retirement is more than 10 years away, these funds can work well for you,” says Parul Maheshwari, certified financial planner.

 

They are also suited for other long-term goals. “Besides retirement, they are ideal for financial goals such as funding higher education or children’s marriage, and even for investors seeking regular income through systematic withdrawal plans. Compounding through equities with stability from debt makes them ideal for riding volatility while achieving long-term goals,” says Borawake.

 

For first-time investors

 

New investors can also consider them. “First-time investors who do not want high volatility but want equity exposure can use these funds. Moderate-risk investors with at least a five-year time frame, who want tax efficiency, can also invest. Such investors can have even a 50–65 per cent allocation to these funds,” says Maheshwari.

 

Sundar adds that the ideal holding period for them should be a minimum of three years.

 

The writer is a Gurugram-based independent journalist