Aggressive hybrid funds offer equity exposure with lower volatility

Check both equity and debt portfolios before investing

After a volatile two-year period that disappointed many equity investors, aggressive hybrid funds have drawn attention as a middle path for those who want market participation but do not want to take the full risk of pure equity funds. The Nifty 50 has delivered an annualised return of minus 0.23 per cent over the past two years. As concerns over crude oil prices ease and expectations of a better equity environment build, advisers say cautious investors could consider this category.

 

According to industry data, 37 aggressive hybrid funds currently manage assets worth Rs 2,60,939 crore. These schemes invest 65-80 per cent of their portfolios in equities and the remaining 20-35 per cent in debt. This structure allows investors to participate in equity-led growth while the fixed-income portion cushions volatility.

 

Equity with a cushion

 

Aggressive hybrid funds remain equity-oriented schemes. Their debt allocation helps reduce the impact of market corrections. Over a market cycle, they have historically delivered returns comparable to large-cap equity funds, though with lower volatility.

 

Harshad Borawake, head of research and fund manager, Mirae Asset Mutual Fund, says aggressive hybrid funds offer meaningful equity participation with built-in downside protection. The debt allocation cushions portfolios during market declines and results in shallower drawdowns than pure equity funds. Borawake adds that the category also benefits from equity taxation despite allocating up to one-third of assets to debt.

 

Alekh Yadav, head of investment products, Sanctum Wealth, says aggressive hybrid funds have historically delivered returns similar to large-cap equity funds while offering better risk-adjusted performance. “The 25-30 per cent allocation to debt cushions downside during corrections without significantly compromising long-term returns,” Yadav says.

 

Investors who build separate equity and debt portfolios need to rebalance them periodically. Aggressive hybrid funds handle this task internally. Fund managers can raise or reduce equity exposure within the permitted range, depending on market opportunities.

 

Tax edge helps

 

Tax treatment strengthens the case for aggressive hybrid funds. Since these schemes maintain at least 65 per cent equity exposure, they qualify as equity-oriented funds for tax purposes.

 

Borawake says this gives them a structural advantage over separate equity and debt portfolios. Debt funds are taxed at the investor's income-tax slab. Aggressive hybrid funds, however, enjoy equity taxation even though a portion of the portfolio remains invested in fixed income. Over longer holding periods, this tax efficiency can improve post-tax returns.

 

Nilesh D. Naik, head of PhonePe Mutual Funds, says investors who manage equity and debt through separate funds often incur taxes while rebalancing. Aggressive hybrid funds offer a more tax-efficient structure.

 

Not a low-risk product

 

Investors should not mistake aggressive hybrid funds for conservative products merely because they contain debt.

 

Niharika Tripathi, head of products and research, Wealthy.in, says the biggest misconception lies in the word "hybrid". These funds remain equity-heavy because they invest 65-80 per cent of their portfolios in equities. The debt allocation reduces losses but does not eliminate them.

 

Tripathi says that during the January-March 2020 market crash, the Nifty 50 declined by around 38 per cent, while aggressive hybrid funds limited losses to roughly 25 per cent. “That is better downside protection than pure equity, but a 25 per cent fall is still a meaningful drawdown for investors expecting a safe product,” she says.

 

The debt portion that cushions losses during corrections can also hold back returns during sharp bull markets. Yadav says investors should expect these funds to underperform pure equity funds when markets rally strongly. They should not judge the category over short periods.

 

Who should invest

 

Aggressive hybrid funds suit investors who want to build equity exposure gradually but do not want to face the full volatility of diversified equity funds.

 

Borawake says they are particularly suitable for first-time equity investors. Lower volatility can make it easier for them to stay invested during corrections, which is important for long-term wealth creation. These funds may also suit conservative investors who want better return potential than traditional fixed-income products but remain uncomfortable with pure equity risk.

 

Tripathi says investors should treat aggressive hybrid funds as part of their equity allocation, not as the safe portion of their portfolio. They suit long-term investors who accept market-linked returns and want debt mainly as a cushion.

 

Investors seeking capital preservation, or those with financial goals due within the next two to three years, should avoid this category. Tripathi says conservative hybrid funds or equity savings funds may suit them better because they carry lower volatility.

 

Naik says investors who actively manage their own equity and debt allocation may derive limited benefit from aggressive hybrid funds.

 

Aggressive hybrid or balanced advantage

 

Investors often compare aggressive hybrid funds with balanced advantage funds, another popular hybrid category. The key difference lies in equity exposure and portfolio management style.

 

Aggressive hybrid funds maintain equity allocation between 65 and 80 per cent. Balanced advantage fund managers, in contrast, dynamically alter equity exposure depending on market valuations. This generally makes balanced advantage funds less volatile.

 

Tripathi says aggressive hybrid funds are appropriate for investors who want an equity-heavy portfolio with some downside cushion. Balanced advantage funds suit investors who prefer smoother returns through dynamic asset allocation.

 

Naik says balanced advantage funds may be useful for cautious investors and those investing lump sums with plans for systematic withdrawals later, provided they first build a sufficient investment buffer.

 

What to check

 

Investors should look beyond recent returns before choosing a scheme.

 

Borawake says investors should examine both the equity and debt portfolios. The equity portfolio's market capitalisation composition affects volatility. The debt allocation should mainly consist of high-quality instruments because its role is to provide stability, not chase higher yields.

 

Tripathi says headline returns can mislead investors. They should assess whether a fund has generated returns with lower volatility or by taking higher risks. A fund that keeps equity exposure closer to 80 per cent will behave much more like a pure equity fund than one that operates near the lower end of the permitted range.

 

Naik says investors should evaluate how fund managers handle market capitalisation allocation in equities, as well as credit and duration risks in the debt portfolio.

 

Stay for the long term

 

Aggressive hybrid funds reduce volatility, but investors should still treat them as long-term products. A horizon of five years or longer is more appropriate for investors who want to benefit from equity market cycles.