Is an Aggressive Hybrid Fund a Wise Choice for Tactical Allocation Amidst the Omicron Variant Uncertainty?

Dec 14, 2021

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Against the backdrop of the uncertainty produced by the virulent Omicron variant for the global economy and the equity markets, certain mutual fund distributors are influencing investors to the Aggressive Hybrid Funds and/or Balanced Hybrid Funds, propagating that they would offer the required tactical allocation.

However, let me tell you that may not necessarily be the case. It all depends on how the fund allocates its assets between equity and debt. As per SEBI's mutual fund categorisation and rationalisation norms, a mutual fund house can offer either an Aggressive Hybrid Fund or a Balanced Hybrid Fund.

The basic difference is that in the case of Balanced Hybrid Funds, the allocation to equity and debt could vary between 40%-60% individually. In other words, a Balanced Hybrid Fund has the mandate to invest anywhere between 40%-60% of the total asset in equity and equity-related instruments, or between 40%-60% of the total asset in debt instruments. No arbitrage opportunities are permitted in this category of mutual funds. On the other hand, an Aggressive Hybrid Fund could invest anywhere between 65% and 80% of the total assets in equity and equity-related instruments and the remaining 20% to 35% in debt instruments.

Given, the tax advantage of maintaining a greater allocation to equities (65% or more), most fund houses, today offer the Aggressive Hybrid Funds. There are hardly any 'Balanced Hybrid Funds' out there. But unfortunately, certain mutual fund distributors inaptly yet intentionally draw parallels to the Balanced Funds to mis-sell to you, the investor.

Given higher allocation to equities, an Aggressive Hybrid Fund is riskier than a Balanced Hybrid Fund. In a turbulent and/or corrective phase of the equity market, an Aggressive Hybrid Fund may not offer you protection against the downside. Hence, never consider them to be 'balanced' in any way.

The use of the word 'balanced' has interchangeably applied to lure you, investors, based on a false premise that you will benefit from tactical allocation and lower risk exposure. Besides, some fund houses declare dividends at regular intervals, so that you buy into this category and generate dividend income.

Also, when the market conditions are favourable or conducive, it becomes easier for mutual fund distributors to push the Aggressive Hybrid Funds because their performance is appealing.

For instance, in the last eighteen months or so, the Aggressive Hybrid Funds have exhibited exceptional returns, supported by the favourable liquidity conditions and investor participation that pushed the Indian equity market to a lifetime high after the COVID-19 March 2020 low. Many of the Aggressive Hybrid Funds have outperformed the category average returns.

Table 1: Performance of aggressive hybrid schemes

Scheme Name Returns (Absolute %) Returns (CAGR %)
1 Year 2 Years 3 Years 5 Years 7 Years
Quant Absolute Fund 57.4 45.0 32.6 21.9 17.0
ICICI Pru Equity & Debt Fund 46.5 27.3 21.7 16.5 14.6
Canara Rob Equity Hybrid Fund 27.3 23.4 20.3 16.6 13.9
Principal Hybrid Equity Fund 32.1 23.7 17.2 16.2 13.8
DSP Equity & Bond Fund 29.5 23.1 21.0 15.7 13.8
Kotak Equity Hybrid Fund 34.8 25.8 22.6 15.8 13.7
SBI Equity Hybrid Fund 27.3 20.1 18.7 15.4 13.5
Franklin India Equity Hybrid Fund 28.1 21.6 17.9 13.7 12.4
Sundaram Equity Hybrid Fund 32.7 21.0 18.6 15.5 12.3
L&T Hybrid Equity Fund 26.4 20.0 16.2 13.5 12.3
Edelweiss Aggressive Hybrid Fund 33.8 23.4 19.7 15.7 12.1
Baroda Hybrid Equity Fund 35.0 24.9 18.5 14.2 11.8
Aditya Birla SL Equity Hybrid '95 Fund 29.9 20.0 15.6 12.5 11.3
UTI Hybrid Equity Fund 35.8 24.7 17.4 13.2 11.3
Tata Hybrid Equity Fund 28.8 19.6 16.3 12.5 11.1
PGIM India Hybrid Equity Fund 29.9 20.3 17.7 13.1 10.2
JM Equity Hybrid Fund 29.5 29.4 16.0 13.2 10.0
Shriram Hybrid Equity Fund 19.7 16.9 14.8 12.7 9.7
HDFC Hybrid Equity Fund 31.2 21.8 17.5 13.1 9.6
Nippon India Equity Hybrid Fund 33.2 12.6 10.1 10.1 9.6
LIC MF Equity Hybrid Fund 19.9 14.8 15.1 11.5 8.3
Category average aggressive hybrid schemes 31.8 22.8 18.3 14.4 12.0
Category average of balanced hybrid schemes 20.5 16.7 14.5 12.6 10.7
CRISIL Hybrid 35+65 - Aggressive Index 23.7 20.6 17.6 14.7 12.2
NIFTY 50 - TRI 31.4 22.9 20.0 17.6 12.5
Data as of December 10, 2021
Given above are only the schemes that have a track record of at least 7 years. Direct Plan and Growth Option considered. A total universe of 34 aggressive hybrid schemes is considered for the calculation of category average.
(Source: ACE MF, PersonalFN Research)

The Aggressive Hybrid Fund, as a category, has outperformed the Crisil Hybrid 35+65 Aggressive Index over a 3-year period. However, their performance on 5-year and 7-year time frames is unimpressive as compared to that of their benchmark.

In the above table, I have also compared the performance of the Aggressive Hybrid Funds vis-a-vis that of Balanced Hybrid Funds, wherein it is observed that over the long term, -- 5 years and 7 years -- the outperformance gap has narrowed substantially.

This goes to show that funds with a greater allocation to debt offer better risk-adjusted returns over a long period.

Looking at the portfolios of Aggressive Hybrid Funds, I found that their equity allocation has been in the range of 70%-80% at most times. And barring their overall lower equity exposure compared to pure equity funds, their investment approach has been hardly different from that of pure equity funds. Notably, some of the Aggressive Hybrid Funds have been taking a large exposure to mid-cap and small-cap companies ---exposing you to very high risk while generating alpha.

A few funds have preferred to carry top-heavy and long-tail portfolios. Meaning the composition of top-10 equity holdings have been on the higher side and a fairly large number of stocks have an exposure below 1%. For instance, in the case of the Principal Hybrid Equity Fund.

Moreover, some Aggressive Hybrid Funds have even participated in pricey Initial Public Offerings (IPOs). Some of them have even invested a huge portion of their portfolio in foreign equity through a Fund of Fund route-take the example of PGIM India Hybrid Equity Fund. As per the portfolio disclosed on November 30, 2021, the fund has 11.2% exposure to PGIM Jennison Global Equity Opportunities Fund.

The top-performing Aggressive Hybrid Funds have taken aggressive sector and company-specific bets in their equity portfolios, but they have been conservative while investing in debt. They have primarily restricted their preferences to sovereign bonds and quasi-government securities.

At present, when the interest rate cycle seems to have bottomed out, a few aggressive hybrid funds such as SBI Equity Hybrid Fund and Edelweiss Aggressive Hybrid Fund have preferred to hold cash rather than allocating to debt securities. Going forward, how they deploy this cash over the next few months will largely decide whether such aggressive calls work for them or go against them.

The true test of an Aggressive Hybrid Fund is when it witnesses a corrective phase or bear market phase. History has proven that not many fund managers of the Aggressive Hybrid Funds have been able to mitigate the downside risk.

Also, when a Hybrid Fund takes exposure to debt, the quality of debt papers it holds matters. If the fund manager engages in yield hunting and invests in low-rated papers, that also is a risk. By now you all know how the Franklin Templeton Mutual Fund endangered its investors' money by taking undue credit risks. But it appears that the fund house has not learnt from the past mistakes. According to the portfolio as of November 30, 2021, Franklin India Equity Hybrid Fund has a 3.19% exposure to Indostar Capital Finance Ltd., which is a "AA-" rated paper. According to Crisil, which has assigned the credit rating of "AA-", the asset quality of Indostar remains susceptible to concentration risk. The rating report published by Crisil, warns against the company's significant exposure to the real estate sector which is vulnerable to economic cycles. Now, while many of you might think that the exposure to Indostar Capital Finance Ltd. debt paper isn't significant, the fact is that it does inflict high risk given the comments of the rating agency.

And that's not the only fund house. Sundaram Equity Hybrid Fund also has exposure to Yes Bank's BBB-rated instruments. Although the exposure dates back and is just 0.1%, it still reflects in the scheme's choices. A few others such as Aditya Birla Sun Life Equity Hybrid '95 Fund and UTI Hybrid Equity Fund amongst others have also burned their fingers in defunct infrastructure companies which once were of the investment grade.

Looking at these instances, I caution you against making any assumption that Aggressive Hybrid Funds are less risky than pure equity funds. I would urge you to look at your mutual fund investment options with the right perspective, and not consider the Aggressive Hybrid Funds for tactical asset allocation.

Is an Aggressive Hybrid Fund a Wise Choice for Tactical Allocation Amidst the Omicron Variant Uncertainty?
(Image source:; photo created by @ijeab)

You may instead consider Balanced Advantage Funds given that valuation in the equity market look stretched and the margin of safety is narrow. Balanced Advantage Funds are Hybrid Mutual Funds that hold the mandate to dynamically allocate assets between equity and debt based on the prevailing market conditions and outlook. During overvalued markets, Balanced Advantage Funds maintain the equity allocation by using hedging techniques (arbitrage opportunities) to lower the risk. This feature distinguishes them from the other hybrid funds. Thus, Balanced Advantage Funds are also known as 'all-season funds' that aim to perform well during both upside and downside market conditions.

That being said, here are some of the vital quantitative as well as qualitative parameters to look into when selecting the best Balanced Advantage Funds for your mutual fund portfolio now and in 2022:

  • Analyse the fund's consistency in performance across various market periods (bull and bear market phases) compared to the benchmark and category peers.

  • Assess whether the fund fares well in terms of risk-reward matrix by evaluating ratios such as Sharpe Ratio, Sortino Ratio, and Standard Deviation, etc. over a 3-year period.

  • Check if the equity portion is well-diversified at the stock and sector level.

  • The fund's debt portfolio should be invested in high-quality liquid papers such as government securities and papers issued by the public sector entities that carry low credit risk.

  • The mutual fund house should have a significant performance track record and must follow robust investment processes with adequate risk management systems in place.

  • Check the qualification and experience of the fund manager, his/her investment strategy, and the track record of the other schemes they manage.

[Read: Why Investing in Balanced Advantage Funds at Market High Makes Sense]

In case, if you need any research-backed guidance to invest in the best mutual fund schemes, I would suggest you subscribe to PersonalFN's premium research service, FundSelect. Currently, with the subscription to FundSelect, you could also get free bonus access to PersonalFN's Debt Fund recommendation service DebtSelect.

At PersonalFN, we select and recommend mutual funds based on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:

  • S - Systems and Processes

  • M - Market Cycle Performance

  • A - Asset Management Style

  • R - Risk-Reward Ratios

  • T - Performance Track Record


PersonalFN's FundSelect service will provide you insightful and practical guidance on which mutual fund schemes to Buy, Hold, and Sell.

If you are serious about investing in a rewarding mutual fund scheme, subscribe now!

Happy Investing!


Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter


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