Do you remember Balanced Funds? Balanced Funds, unfortunately, were not very balanced - not very true to their name. A predominant portion, i.e. over 65% of net assets was parked in equities and the remaining in debt.
And actually, going by the name, balanced funds are assumed to keep a 50:50 allocation to equity and debt. But on the contrary, most such schemes were freely varying their exposure to equity, from a minimum 65% to as much as 80%. This ultimately drew a lot of criticism from the capital market regulator.
Post the re-categorisation norm, SEBI clearly defined a 'Balanced Hybrid Fund' and an 'Aggressive Hybrid Fund'. Mutual fund houses can offer an Aggressive Hybrid Fund or a Balanced Hybrid Fund, not mix the two. Weightage of equity and debt vary from 40% to 60% in the case of a Balanced Hybrid Fund.
In this article, we'll specifically talk more in detail about 'Aggressive Hybrid Fund' and the best ones to invest in 2019.
Aggressive Hybrid Fund
According to SEBI categorisation norms, an Aggressive Hybrid Fund invests equity 65% to 80% of total assets in equities and the rest 20%-35% in debt instruments. Therefore, on account of the portfolio being skewed to equities, they are termed as 'aggressive', although hybrid in nature.
To accomplish their stated investment objective, Aggressive Hybrid Funds mostly follow aggressive investment strategies. And vide their debt portfolio, can be defensive to protect you to an extent from the extreme adversities of the equity markets.
As you might be aware, equity and debt as asset classes share a negative co-relation. In other words, they don't move in tandem, in the same direction.
Graph 1: Risk-return trade-off
Note: for illustrative purpose only
(Source: PersonalFN Research)
Certain Aggressive Hybrid Funds also have the flexibility to include 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%.
Why invest in Aggressive Hybrid Funds?
Sometimes, situations demand you to be aggressive -particularly, when you are addressing long-term financial goals [viz. your children future needs (their education and wedding expenses) and your retirement] and have sufficient time in hand (5 years and more) before the goals realise. This is when skewing your investments towards equities can be worthwhile.
Correspondingly, it's quite possible that your nature, in general, is aggressive. But can you be aggressive all the time? The answer is no. You ought to have a fair balance, even though you could be aggressive. And switching on and off between aggression and conservation is difficult indeed if you have to do it by yourself. This is where an Aggressive Hybrid Fund is advantageous to have exposure to both, equity and debt instruments in a tactical way.
Who should invest in Aggressive Hybrid Funds?
Your investment time horizon ought to be at least 5 years before you consider an Aggressive Hybrid Fund.
Do note that while taking exposure to equities, an Aggressive Hybrid Fund could take exposure across market capitalisation segments (viz. large-cap, mid-cap, small-cap) and sectors, depending on the investment mandate and strategy of each scheme.
As mentioned before, an Aggressive Hybrid Fund could even explore arbitrage opportunities. Further, for defensive consideration, a portion of its net assets (20%-35%) is deployed in debt instruments.
Nevertheless, given the dominant exposure to equities, an Aggressive Hybrid Fund is suitable for investors with a moderately high-risk appetite. This is because, when equities hit turbulence or a rough patch, the risk of capital erosion cannot be ignored.
Graph 2: Risk-return traits of other equity mutual funds
Note: for illustrative purpose only
(Source: PersonalFN Research)
But, compared to other diversified equity funds (mid-cap funds, small-cap funds, sector/thematic funds), an Aggressive Hybrid Fund is well-placed on the risk-return spectrum faring differently on a risk-return basis by clocking decent return perhaps at relatively less risk.
Which are the best performing Aggressive Hybrid Funds?
The year 2018 was a better year for Aggressive Hybrid Funds. The tactical allocation to equity and debt, helped Aggressive Hybrid Funds outperform the Nifty 500 Total Return Index (TRI).
Table: Top-10 Aggressive Hybrid Funds of 2018
Data as on February 22, 2019
(Source: ACE MF)
*Please note, this table only represents the best performing Aggressive Hybrid Funds based solely on past returns and is NOT a recommendation.
Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.
Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.
Sundaram Equity Hybrid Fund(G) and Mirae Asset Hybrid-Equity Fund(G) outperformed the Crisil Hybrid (35+65) Aggressive Index in 2018. But over longer time frames, schemes such as Canara Rob Equity Hybrid Fund(G), ICICI Pru Equity & Debt Fund(G), Principal Hybrid Equity Fund(G), and SBI Equity Hybrid Fund(G), have fared well.
The Best Aggressive Hybrid Funds for 2019
Like in the case of any other mutual fund scheme, past performance of Aggressive Hybrid Funds is not indicative of future performance. That said, you may consider the following schemes which have performed well over longer time frames:
- ICICI Pru Equity & Debt Fund(G),
- Principal Hybrid Equity Fund(G),
- Mirae Asset Hybrid-Equity Fund(G)
- SBI Equity Hybrid Fund(G),
- HDFC Hybrid Equity Fund(G)
The above are the top-5 Aggressive Hybrid Funds that have shown superior performance and consistency on all parameters -quantitative as well as qualitative. The aforesaid funds have adequately compensated its investors for the level of risk taken.
[Read: Why Qualitative Aspects Are So Important To Pick Mutual Funds]
When you select best Aggressive Hybrid Funds for 2019, avoid schemes that haven't completed a 3-year track record in the interest of your investment portfolio.
Is market outlook conducive to invest in Aggressive Hybrid Funds?
The following are some of the key factors in 2019:
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Lok Sabha election in 2019
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Geopolitical tensions
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Trade tensions
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Brexit
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Flagging economic growth
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Need to see how central banks respond in their monetary policy action
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Fiscal deficit management in India
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Growth in corporate earnings
Although there will be an overhang of tensions between India and Pakistan in the South Asia region, Indian markets may not react negatively further unless both the nations engage in a full-blown war. Given the growing support of global powers to India's stand on 'surgical strikes on terrorism' and considering Pakistan's fragile economic condition, escalations are a remote possibility.
On the global front, China and the U.S. are yet to reach mutually agreeable trade pacts. Speaking about Europe, hard Brexit might spook the markets. It remains to be seen if the U.K. gets an extension.
The Federal Reserve's monetary policy stance would be crucial; because it will largely affect the flow of global capital to emerging markets. No rate hike or rate cuts would be positives for emerging markets.
As far as the political stability in India goes, there are expectations that India might get a stable government. If the NDA government manages to retain its place in the centre, it might be seen as a positive for Indian markets.
Although India's widening fiscal deficit is a real worry, all the other factors that drive bond markets, viz. inflation, credit growth, policy stance, liquidity, etc. remain benign at this juncture. Unless mutual fund houses goof up the credit quality of the portfolio, debt component of the portfolio might remain a lot steady in 2019 as compared to that in 2018.
Suitability of aggressive hybrid funds in 2019...
The tactical allocation of Aggressive Hybrid Fund would prove advantageous. Most of the responsible and process-driven fund houses would ensure that quality portfolio of equity and debt instruments is held plus adequately diversified to deal with adverse market conditions. Markets would be keen to know if India Inc. manages to report better number in FY 2019-20. Higher growth in corporate profits might push equity indices higher.
How to select an Aggressive Hybrid Fund wisely?
(Image source: freepik.com)
Quantitative Parameters
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Performance and risk analysis
This is to analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns.
Under this, the fund needs to be ranked on quantitative parameters like rolling returns across short-term and long-term periods, such as 1-year, 3-years and 5-years, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.
[Read: Why Comparing Returns to Risk Is More Meaningful!]
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Performance across market cycles
You need to ensure that the fund has the ability to perform consistently across multiple market cycles. Therefore, compare the performance of the schemes vis-a-vis their benchmark index across bull phases and bear market phases.
A fund that performs well on both sides of the market should rank higher on the list.
Qualitative Parameters
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Portfolio Quality
Adequate Diversification - The scheme should not hold a highly concentrated portfolio. The portfolio should be well-diversified and the exposure to the top-10 holdings should be ideally under 50%.
Credit Quality - For debt component, you need to ensure that the fund does not hold a high proportion of low-rated (securities rated AA or below) or unrated debt instruments. A fund with a higher credit quality should be ranked higher.
Low Churn - Engaging in high churning can result in trading and high turnover cost. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in high churning, i.e. those funds with a turnover ratio of more than 100%.
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Quality of Fund Management
You also need to consider the fund manager's experience, his workload, and the consistency of the fund house. Therefore, assess the following:
The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade. But note that experience isn't always enough. Some schemes managed by fund managers with 15-20 years of experience haven't necessarily done consistently well for a long time.
The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is not loaded with a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.
The efficiency of the fund house in managing your money - Do your research about the fund house's consistent performance across schemes. Find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication that their investment processes and risk management techniques are sound and efficient.
Know more about PersonalFN's research methodology here.
Watch this short video on selecting mutual fund schemes:
How to invest in Aggressive Hybrid Funds?
Once you select worthy aggressive hybrid funds for your portfolio, start investing in them preferably through Systematic Investment Plans (SIPs). Ensure you have an investment time horizon of at least 5years and appetite for moderately high risk. With SIP you will be able to mitigate the risk involved better vide the benefit of rupee-cost averaging. And finally, choose direct plans over a Regular Plan to invest.
Remember this when you invest in mutual funds:
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Clearly identify your financial goals.
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Recognise the financial goals you wish to achieve and align your mutual fund investment to them.
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Gauge the time horizon before the financial goals befall.
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Assess your risk appetite. Only if you have a high-risk appetite and longer time horizon (at least 3-5 years) for the fulfilment of goals, invest more in equity-oriented mutual funds; otherwise, stick to debt mutual funds and other fixed-income investments.
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Based on your risk appetite, draw up a personalised asset allocation chart and invest accordingly.
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And last but not the least; keep reviewing your investment so as to ensure you're on track to accomplishing your envisioned financial goals.
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Author: PersonalFN Content & Research Team