You might have heard from your favorite mutual fund manager or experts that hybrid funds are likely to show their mettle in the coming year. Hybrid mutual funds or schemes that invest mostly in equity and debt fare better in an uncertain or volatile environment. Mutual fund experts believe that markets are likely to be cautious and investors should also proceed with caution.
Aggressive hybrid funds are one of the popular hybrid mutual fund categories. These schemes are mandated to invest in a mix of equity (or stocks) and debt. As per Sebi norms, these schemes must invest 65-80% in stocks, and 20-35% in debt. This mixed portfolio helps to deal with the market volatility better. When the equity market is in turmoil, the debt part of the portfolio softens the blow. This helps new investors to continue with their investments without worrying too much about volatility.
If you are bothered about the uncertainties and volatility in the market, you can consider investing in aggressive hybrid mutual funds. Mutual fund advisors typically recommend aggressive hybrid fund schemes to ‘conservative’ equity investors to create wealth to achieve their long-term financial goals.
A ‘conservative equity investor’ is not the same as a conservative investor. A conservative investor doesn’t want to take risks at all. These investors typically park their money in bank deposits, bonds, etc which give them predictable returns. A conservative equity investor is ready to take risk, but he or she doesn’t want too much risk and volatility. So, a conservative equity investor typically wants to grow wealth without exposing her investments to too much volatility.
Mixed portfolio
Another advantage of investing in these schemes is their mixed portfolio of equity and debt. In order to maintain the asset allocation, the fund manager would constantly book profits, and this will boost the returns. Suppose the equity allocation has gone beyond the original plan in a bull market. The fund manager would sell the stocks to maintain the allocation. This profit-booking, over a long period of time, would enhance the returns.
Sure, you can do such an allocation and create your own mutual fund portfolio. However, when you book profits, you may have to pay taxes on gains of over Rs 1 lakh in a financial year. A mutual fund, on the other hand, is not liable to pay taxes. This again would help investors to enhance their returns.
Now that you know about these schemes, here are the points you should remember before deciding to invest in aggressive hybrid funds. One, the mixed portfolio of these schemes helps you to limit volatility and create wealth over a long period. Two, regular profits booking would help these schemes to boost profits. Three, they offer a tax advantage. Lastly, don’t rely on regular dividends from these schemes to draw up a regular income.
However, you should always remember none of these factors make aggressive hybrid schemes risk free. Any scheme that invests a minimum 65% in stocks, can’t be risk free. Stocks are risky. So, you should be prepared for some volatility in the short period.
Here is an update: SBI Equity Hybrid Fund has been in the third quartile for 12 months. Mirae Asset Hybrid Equity Fund and Canara Robeco Equity Hybrid Fund have been in the third quartile for the last 10 months. Note, these schemes have been part of our recommendation list in 2023, too. We have been closely watching these schemes. Please follow our monthly updates if you are investing in these schemes.
Aggressive hybrid schemes to invest in March 2024:
Methodology
If you want to invest in these schemes, you may be interested to know how we chose these schemes. Take a look at our methodology:
ETMutualFunds has employed the following parameters for shortlisting the hybrid mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of the randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i) When H = 0.5, the series of returns is said to be a geometric Brownian time series. These types of time series are difficult to forecast.
ii) When H is less than 0.5, the series is said to be mean reverting.
iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance
i) Equity portion: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}
ii) Debt portion: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
5. Asset size: For Hybrid funds, the threshold asset size is Rs 50 crore
(Disclaimer: past performance is no guarantee for future performance.)
