With boom in equity markets, aggressive hybrid funds gain currency

With Indian equities at record highs and concerns around pricey valuations, some investors are seeking refuge in so-called “aggressive hybrid” funds. Experts say such funds can help cushion the downside if the market corrects. In July, the category received net inflows for the first time in 2021.

Before 2017, the aggressive hybrid category was much-favoured among investors as it posed less risk than pure equity funds and provided far higher returns than debt schemes. Later, such hybrid funds went out of fashion as equity returns plateaued.

With the boom in the equity markets now, the category is back in demand, say industry observers. In July, the aggressive hybrid category saw net inflows of Rs 741 crore, shows the data from the Association of Mutual Funds in India (AMFI).

Ashish Naik, equity fund manager, Axis Mutual Fund, says: “Since the March 2020 lows, the equity markets have witnessed a one-sided rally which was rather unexpected. As the category allocates about 65-80 per cent funds towards equities, the sharp movement in the equity market has benefited investors immensely.” Such schemes have a mandate to invest 65-80 per cent of assets in equities and the remaining in debt securities.

Over the past year, the aggressive hybrid category has given average returns of 41 per cent — more than other hybrid categories like multi-asset allocation, dynamic asset allocation, and conservative hybrid.

Chintan Haria, head-product development and strategy, ICICI Prudential AMC, says: “By providing investors with a mixed portfolio of equity and debt in a predefined manner, the equity and de­bt funds offer the best of both asset classes and hence, are one among the mo­st appealing fund categories. The debt portion adds stability to the overall returns and the equity portion offers po­tential for long-term wealth creation.”

In the aggressive hybrid category, some of the funds have given returns of 45-53 per cent over the past year. A few funds with greater exposure to mid- and small-cap stocks have given even better returns — of around 70 per cent.

Many investors confuse the aggressive hybrid category with balanced advantage funds, which also have seen a lot of traction in recent months. Asset allocation in aggressive hybrid categories is static, while balanced advantage funds (BAF) tweak their equity and debt allocation based on the underlying market conditions.

“Aggressive hybrid funds remove the timing element and given the higher exposure of around 70 per cent, historically have ended up with higher returns over the BAF category in the long term,” says Arun Kumar, head of Research at FundsIndia. In the past year, BAF have given average returns of 23.41 per cent.

With high allocation towards equity, aggressive hybrid categories have given better returns even in the longer time frame. In the last 10 years, such funds have given average returns of 13 per cent. In comparison, the large-cap fund category has given average returns of 13 per cent.

“Investors should come in with a minimum 5-7 years’ timeframe and expect a slightly lower volatility profile than pure equity funds and long-term returns which are comparable to equity funds,” adds Kumar.