We at Value Research have been great admirers of aggressive hybrid funds for a long time. In a swarm of needless mutual fund schemes that keep coming your way, aggressive hybrids are among the handful that investors really need. In this update, we talk about the utility of this age-old category, how their popularity has trended and what these funds are up to these days. We also bring you up to speed with the changes in our recommendations in this category. What are these funds? As the name suggests, hybrid funds invest partly in equity and partly in debt. These funds invest about 70-75 per cent of your money in equity shares and the remaining in bonds and debentures. But don't be misled by the word 'aggressive' in their name. They are actually suitable for 'conservative' growth investors. Confused? Read on! What's the investment case? Being majorly invested in equity shares, these funds are close to pure equity funds in terms of returns. For example, an average flexi-cap fund has delivered about 13 per cent returns per annum in the last five years, while an average aggressive hybrid returned a little over 11 per cent. So, of course, returns are less than a pure equity fund, but they offer pretty good wealth creation potential. The real value of aggressive hybrid funds lies in how they behave during stress in the markets. Whenever equity markets tank, which they do every now and then, these funds fall a shade lesser. That's because debt securities don't rise and fall as wildly day-to-day as equity shares do. Therefore, their presence in the portfolio acts as a shock absorber. See graph Downside protection for some real-life proof. Every year, when the equity markets are down, aggressive hybrids outdo the flexi-cap funds. We think this rough-weather tenet is of tremendous value to conservative growth investors, even more so for a newbie. Their toughest challenge is to stay invested when the markets turn bad. When the investment value erodes by 20-30 per cent in a matter of a week, investors' understanding of their risk tolerance can completely change. New investors, who haven't experienced such a market fall before, are prone to sell in panic. But what if you lose lesser than the markets? What if your investments are down 15 per cent when the markets have lost 20 per cent? It provides a psychological cushion, and it can well turn out to be the difference between exiting in panic at the worst possible time (never to return) or withstanding the transitory downfall to reap the rewards later. With their 25 per cent debt allocation, that's exactly what aggressive hybrid funds are capable of delivering. Therefore, we think these funds are a no-brainer for new investors. But why not Balanced Advantage funds? That's the question the more nuanced of you ask often. Balanced Advantage Funds (BAFs) have become quite a rage of late, thanks to a compelling product pitch greatly amplified by high decibel marketi
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