Aggressive Hybrid Funds: Meaning, benefits, and How it works?
It is often advised, “one should not keep all its eggs in the same basket.” Similarly, one should not stay invested in a single asset class and, instead, diversify the portfolio across different asset classes to mitigate the investment risk.
Hybrid funds allow the investors to invest across equity and debt to align their asset allocation suitably with their risk appetite, as one can opt to invest in aggressive hybrid funds, balanced hybrid funds, or conservative hybrid funds. Such funds are classified based on the specified allocation ratio for equity and debt within their portfolio. This article aims to discuss the meaning, benefits, and taxation of aggressive hybrid funds.
What is an Aggressive Hybrid Fund?
Such funds form a specified category of mutual fund schemes amongst the hybrid funds investing predominantly in equity and equity-related instruments. As per the classification norms issued by the Securities & Exchange Board of India (SEBI), an aggressive hybrid fund must have an investment of 65%-80% of its net assets in equities, while the balance may be invested in debt securities.
With the tendency of retail investors to invest in equity-focused funds, such funds (considered along with balanced hybrid funds) are the most popular category within the hybrid funds with an AUM (Assets Under Management) of Rs. 1.1 lakh crores as on 30th Sept 2020 Source: Association of Mutual Funds in India – AMFI.
Since the mutual funds can offer either of the balanced hybrid fund or aggressive hybrid funds, the data for such funds is available only in conjunction with balanced hybrid funds.
Advantages of Aggressive Hybrid Funds
Investors may invest separately in equity funds and debt funds as per their risk appetite and investment horizon. However, aggressive hybrid mutual funds allow the investors to have an exposure to both equity as well as debt within a single mutual fund scheme itself.
With investment in such funds, the investors enjoy diversification across asset classes. They are equipped with the potential of better returns through equity, coupled with the stability of the investment portfolio through debt funds. Further, with mandated investment allocation of at least 65% in equity securities, such funds enable the investors to enjoy special tax rates on their investments, irrespective of the tax rates applicable to them.
How to Invest in Aggressive Hybrid Funds?
The procedure to invest in such funds is the same as investing in other mutual fund schemes. One may invest in such funds by physically visiting the official Points of Acceptance for the mutual funds or invest online through the website/ mobile app of the mutual fund house or Registrar & Transfer Agent (R&TA).
Taxation of Aggressive Hybrid Funds
As per the Income Tax Act 1961, the gains from mutual fund investment are taxed at the time of redemption when the profits are realised. Since aggressive hybrid funds must invest 65% to 80% in equities, such funds can be classified as equity-oriented mutual funds under the tax laws.
The gains are classified as STCG if the holding period for such funds less than 12 months is and taxed at 15%. On the other hand, the gains can be classified as LTCG if the holding period has been 12 months or more and taxed at 10% (after considering an exemption of Rs. 1 lakh for aggregate LTCG from equity shares and equity funds in a year).
Note: The tax provisions, as mentioned in the article, are for illustrative purposes only, and are updated as per the Finance Act 2020. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.