Are These The Best Aggressive Hybrid Funds (Earlier Balanced Funds) For 2018?


Until a few months ago, Balanced Funds were synonymous with equity-oriented Hybrid Funds that invested over 65% of their assets in equity. Clearly, Balanced Funds were not true to their name.

While balanced funds are assumed to keep a 50:50 allocation to equity and debt, most such schemes were free to vary their exposure to equity, ranging from a minimum 65% to as much as 80%. This drew a lot of flak from the regulator.

Fund houses offered an explanation—a reason for this lopsided allocation. In order to qualify as an equity scheme, a minimum equity allocation of 65% is required. Since, equity schemes enjoy a tax advantage over non-equity schemes, an additional 15% exposure over the halfway mark would not lead to substantially higher risk. At the end of the day, investors would reap the tax benefits.

For those not aware of the tax impact:

For equity funds, gains on units redeemed before the completion of 12 months is considered as Short-term Capital Gains (STCG). The gains are taxed at 15% (surcharge and cess extra). Long Term Capital Gains over Rs 1 lakh is taxed at 10% (surcharge and cess extra) without indexation.

For non-equity schemes, gains on units redeemed before the completion of 36 months is considered as STCG. These gains are added to your income and taxed accordingly. Therefore, if you fall in the highest tax bracket, the tax liability can go up to 35.54% (30% tax plus 15% surcharge and 3% cess). LTCG in case of non-equity funds are taxed at 20% with indexation (23.69% including surcharge and cess).

But the regulator was not comfortable with the nomenclature AMC used for their mutual fund schemes. After years of deliberation, the market watchdog formally released a circular on the categorization and rationalization of mutual funds. This was aimed to create standardization in the mutual fund industry. It would help investors to compare and choose funds better.

The broad Balanced Funds category was split into two different types, and fund houses were allowed to choose only one –

Balanced Hybrid Funds that can invest 40% to 60% of total assets in equities and 40% to 60% in debt instruments. No Arbitrage would be permitted in this scheme.


Aggressive Hybrid Fundsthat are allowed to invest 65% to 80% of total assets in equities and 20% to 35% in debt instruments.

Clearly, Balanced Hybrid Funds do not qualify as equity funds. But they stand true to their name, by keeping a balanced exposure to equity and debt. Though, investors would stand to lose due to the tax implications. Interestingly, the market regulator did not foresee this as a redundant category.

Almost all fund houses classified their earlier balanced funds as Aggressive Hybrid Funds.

Unlike Balanced Hybrid Funds, where no Arbitrage is permitted, Aggressive Hybrid Funds have the flexibility to include an arbitrage exposure.

The term ‘Arbitrage’ refers to the simultaneously buying and selling of a security in two different markets, with an aim to gain from the price difference. Since, the transactions are in either direction, the positions are completely hedged. Hence, arbitrage transactions are virtually risk-free and are capable to earn a return ranging between 6%-8%.

If your balanced fund classification has changed to an Aggressive Hybrid Fund, you probably wouldn't need to worry. The scheme is likely to stick to its existing investment strategy, though there may be a change in the fund name and minor changes in the asset allocation.

Your existing balanced fund may have also been classified as a Balanced Advantage Fund.

Balanced Advantage Funds can also be referred to as Dynamic Asset Allocation Funds. Under these schemes the allocation to equity and debt will be managed dynamically, i.e. the equity or debt exposure can vary between 0%-100%.

Though Balanced Advantage funds also set their asset allocation as per the direction of the market, they tend to keep a minimum 65% exposure to equity at all times.

How do they remain balanced?— if the unhedged equity exposure or long equity positions falls below 65%, the fund house can compensate for it with arbitrage equity positions. Thus, the fund can remain dynamic and tax-efficient at the same time.

For an investor, Aggressive Hybrid Funds and Balanced Advantage Funds have a similar risk-reward potential. Balanced Advantage Funds are better equipped to manage volatility. But the performance of the schemes lies in the fund managers skill and ability.

Below is the list of top Aggressive Hybrid Funds and Balanced Advantage Funds based on their returns over the past three years.

Top Aggressive Hybrid Funds Over The Past Three Years

Scheme Name 3 Years (%)
Principal Hybrid Equity Fund 13.61
Reliance Equity Hybrid Fund 10.60
ICICI Pru Equity & Debt Fund 10.58
HDFC Balanced Advantage Fund 10.22
L&T Hybrid Equity Fund 10.10
Aditya Birla SL Balanced Advantage Fund 10.03
Sundaram Equity Hybrid Fund 9.99
Aditya Birla SL Equity Hybrid '95 Fund 9.59
Canara Rob Equity Debt Allocation Fund 9.45
SBI Equity Hybrid Fund 9.39
DSPBR Equity & Bond Fund 9.38
UTI Hybrid Equity Fund 9.31
ICICI Pru Balanced Advantage Fund 9.00
Quant Balanced Fund 8.76
Kotak Equity Hybrid Fund 8.07
Franklin India Equity Hybrid Fund 7.91
Baroda Pioneer Hybrid Equity Fund 7.89
Reliance Balanced Advantage Fund 7.29
Shriram Hybrid Equity Fund 6.57
Tata Hybrid Equity Fund 6.04
JM Equity Hybrid Fund 5.58
HDFC Hybrid Equity Fund 5.16
DHFL Pramerica Hybrid Equity Fund 4.50
LIC MF Equity Hybrid Fund 3.01
CRISIL Hybrid 35+65 - Aggressive Index 9.79
S&P BSE 200 - TRI 10.70
Crisil Composite Bond Fund Index 7.50
Data as on June 29, 2018
*Returns are compounded annualised
(Source: ACE MF, PersonalFN Research)
*Please note, this table only represents the best performing balanced mutual fund schemes based solely on past returns and is NOT a recommendation. This is for information purposes only.

If the fund house has changed the asset allocation for existing balanced schemes, it will have a direct impact on the performance of the scheme in the future.

If the fund house reclassified the schemes as Aggressive Hybrid Funds with no change to the investment objective, these will be suitable for moderate to high-risk investors. As with all equity-oriented schemes, you need to maintain an investment horizon of five years or more.

You need to pick a scheme that has performed consistently through the years. Given the burgeoning assets, you also need to check if there is a noticeable change in asset allocation and the quality of stocks in portfolio. You do not want to end up with a scheme with illiquid investments.

Editor’s note:

If you’re unsure where to invest fresh investible surplus currently, to strike the correct risk-return trade-off we recommend adopt a ‘core and satellite approach’ to investing. Here are 6 benefits of ‘core and satellite approach’:

  • Facilitates optimal diversification;

  • Reduces the risk to your portfolio;

  • Enables you to benefit from a variety of investment strategies;

  • Aims to create wealth cushioning the downside;

  • Offers the potential to outperform the market; and

  • Reduces the need for constant churning of your entire portfolio 

‘Core and satellite’ investing is a time-tested strategic way to structure and/or restructure your investment portfolio. Your ‘core portfolio’ should consist of large-cap, multi-cap, and value style funds, while the ‘satellite portfolio’ should include funds from the mid-and-small cap category and opportunities style funds.

But what matters the most is the art of astutely structuring the portfolio by assigning weightages to each category of mutual funds and the schemes you select for the portfolio. 

Moreover, with change in market outlook the allocation/weightage to each of the schemes, especially in the satellite portfolio, need to change.

Keep in mind: Constructing a portfolio with a stable core of long-term investments and a periphery of more specialist or shorter-term holdings can help to deliver the benefits of asset allocation and offer the potential to outperform the market. The satellite portfolio provides the opportunity to support the core by taking active calls determined by extensive research.

So, PersonalFN offers you a great opportunity, if you’re looking for “high investment gains at relatively moderate risk”. Based on the ‘core and satellite’ approach to investing, here’sPersonalFN’s latest exclusive report: The Strategic Funds Portfolio For 2025 (2018 Edition).

In this report, PersonalFN will provide you with a readymade portfolio of its top equity mutual funds schemes for 2025 that have the ability to generate lucrative returns in the long run. PersonalFN’s “The Strategic Funds Portfolio for 2025” is geared to potentially multiply your wealth in the years to come. Subscribe now! 

Author: Jason Monteiro


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