Aggressive hybrid fund offer wealth creation opportunities over medium to long term along with reasonable downside protection. Tax efficiency is the added advantage with this category. Further, being a mix of debt and equity, they are comparatively less volatile than pure equity funds.
A prudent analysis can help in choosing an ideal aggressive hybrid fund. Here are the 4 parameters to be considered.
Fund house’s expertise and reputation
A fund’s performance is largely influenced by fund managers’ skill-set, as they build and manage the portfolio of underlying assets. Using their acumen, fund managers determine the percentage of equity/debt exposure and identify sectors/stocks/bonds for investing. You can gauge fund managers’ proficiency through the performance of funds they manage.
Another important factor is fund house’s reputation. Fund houses having a process-driven approach ensure consistent performance regardless of any changes in the team of fund managers.
Fund’s response across market cycles
A fund’s historic performance shows its response to market highs and lows. Bhilai MFD Ashish Mehta said that distributors should look at rolling returns before selecting hybrid funds. “Rolling returns of aggressive hybrid funds must be reviewed for at least 5 years while evaluating their past performance.” Rolling returns represent the average annualised return for multiple consecutive holding periods and are easily available on mutual fund tracking websites. Alternatively, you can also use online rolling returns calculators offered by Mirae Asset Mutual Fund.
Also, evaluate a fund’s performance against its benchmark index for understanding its overall performance viz a viz the broad market. You may select funds which are consistently outperforming their benchmark.
Quality and composition of underlying assets
Aggressive hybrid funds invest 65% to 80% of their total assets in equity and 20% to 35% in debt. Both these components should be reviewed individually.
Equity component - It is advisable to have a diversified asset base. Diversification can be ascertained by reviewing sector-wise exposure as well as the market cap in which a fund invests.
You can also evaluate risk level of scheme by looking at its equity component. For instance, if a hybrid fund has high exposure to mid and small cap stocks, it is riskier than a fund which has high exposure to large cap stocks.
Debt component – See if the scheme has invested in high quality debt instruments. You should avoid schemes having high exposure to debt instruments carrying credit ratings of AA or less.
Further, in the case of an inter scheme transfer (IST), the rationale and the nature of assets transferred must be reviewed. Click here to read more about reviewing the debt component of hybrid funds.
Impact of cost on returns
MFDs should be mindful of TER and exit load. Also, aggressive hybrid funds undertake regular rebalancing for maintaining equity and debt investments within the prescribed limits. Rebalancing amounts to active trading and understandably higher costs.
It is advisable to compare the cost structures and pick the fund with a relatively less cost.
Ideal time frame for aggressive hybrid funds
MFDs -Mukesh Dedhia and Amit Surpuriya recommend a time frame of at least 5 years for investing in these funds to their clients.
Given the lesser volatility as against pure equity, Ashish usually advises moving from equity to aggressive hybrid when the goal maturity approaches.
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