Understanding Nuances of Aggressive Mutual Funds

Aggressive mutual funds prioritize investing in growth stocks in order to maximize capital gains, as their name suggests. These funds have a higher risk profile, but the possibility of long-term gains is alluring.

These funds, which are positioned between debt and equity funds, take advantage of opportunities in both markets. Although each hybrid fund has a different mix of debt and equity allocated to it, SEBI has designated aggressive funds that have an equity ratio between 65% and 80%. So, let’s explore all about aggressive mutual funds in detail.

What are aggressive mutual funds?

Aggressive Mutual Funds are hybrid funds that allocate 20%–35% of their total assets to money market and debt instruments and the remaining 65%–80% to equity and equity-related instruments. Generally speaking, balanced hybrid funds aren’t allowed to profit from arbitrage opportunities—not even in cases where the fund manager is guaranteed strong returns.

Compared to balanced funds, the majority of aggressive hybrid mutual funds provide their fund managers with far more autonomy. Thus, arbitrage opportunities are available for Aggressive Funds to exploit. In addition, the fund manager has the choice of choosing equities according to the growth or value investing styles. Additionally, the fund manager can choose between securities that are differently sensitive to fluctuations in interest rates when choosing debt securities.

Types of aggressive mutual funds

There are mainly two types of aggressive hybrid mutual funds: –

1. Aggressive growth

Less money is allocated to income assets by these funds, which are largely focused on growth assets. Big profits are what they are supposed to produce. Those investors who can afford a higher degree of investing risk should consider them.

2. Aggressive hybrid

These funds engage in debt instruments as well as stocks. Their stock allocation ranges from 65 to 80 percent. Customers who want an automated asset allocation and rebalancing solution and are in the accumulation phase should use them.

What are the characteristics of aggressive mutual funds?

1. High Risk

As mentioned earlier, aggressive hybrid mutual funds carry a higher risk compared to varied other types of mutual funds. This is because they invest in companies with smaller market capitalization, making them more susceptible to market volatility and economic downturns.

2. High Returns Potential

Due to their aggressive investment strategy, these funds have the potential to generate high returns in a shorter time frame. This makes them attractive to investors looking for quick growth and willing to take on higher risks.

3. Long-Term Investment Horizon

Aggressive growth mutual funds are not suitable for short-term investment goals as they require a longer time horizon to ride out market fluctuations and generate higher returns. However, a minimum investment horizon of 5-7 years is recommended for these funds.

Benefits of investing in aggressive mutual funds

1. High Growth Potential

As mentioned earlier, these funds have the potential to generate high returns in a shorter time frame. So, if you are looking for quick growth, aggressive mutual funds may be a good option.

2. Diversification

By investing in different companies and sectors, these funds offer diversification within the equity asset class. This helps in lowering the overall risk of your portfolio.

3. Professional Management

Aggressive mutual funds are managed by experienced fund managers who have access to research and resources, making them better equipped to make investment decisions. This can be beneficial for investors who do not have the time or knowledge to manage their investments.

Risks associated with aggressive mutual funds

Before you rush into investing in aggressive growth mutual funds, it is crucial to understand the potential risks involved. Some of the common risks associated with these funds include:

1. Volatility

As mentioned earlier, aggressive mutual funds are more volatile as compared to various other types of mutual funds due to their investment strategy. This means that the value of your investment can fluctuate significantly, even on a daily basis.

2. Market Risk

These aggressive growth mutual funds are also exposed to market risk, which means that they can be affected by factors such as economic conditions, political events, and interest rates. This can lead to fluctuations in the fund’s performance.

3. Liquidity Risk

As these aggressive allocation mutual funds primarily invest in smaller companies, there may not always be a ready market for their stocks. This can make it difficult to sell your units when you need to, potentially resulting in losses.

How do aggressive mutual funds work?

According to SEBI standards, aggressive allocation mutual funds commit a minimum of 20% of their investments to debt and FD-like instruments, balancing their equity and debt portfolio. Debt instruments give stable income, while stocks offer long-term value creation. 

Mutual funds that are aggressive hybrids seek to bundle the two advantages into one investment. The secret to generating good returns is to be patient and have a long time horizon since debt investments serve as a buffer against underperformance. At the same time, the equity component flourishes during price surges.

Who should invest in aggressive mutual funds?

• Experienced investors who are comfortable with taking on higher risks for potential higher returns.
• Investors along with a long-term investment horizon of 5-7 years, as these funds may experience short-term fluctuations in performance.
• Individuals are looking for diversification within their equity portfolio and seeking exposure to high-growth companies.
• Those who can tolerate market volatility and have the patience to ride out fluctuations.
• Investors who have a thorough understanding of the fund’s objectives, strategy, and potential risks.

Taxation rules of aggressive mutual funds

Aggressive funds are taxed as pure equity funds even when they have exposure to debt instruments.

• Long-term capital gain tax: 10% of capital gains over Rs 1 lakh for more than a year of investment are subject to this tax.

• Short-term capital gains: Applying capital gains for less than a year of investment is levied at a rate of 15%.

The bottom line

Aggressive mutual funds are a type of equity fund with an aggressive investment strategy that aims to provide high returns in the long run. While they offer potential benefits such as diversification, professional management, and high growth potential, they also carry higher risks as compared to other types of mutual funds. It is important for investors to thoroughly research and understand these funds before making any investment decisions, and they should only be considered by investors who are comfortable with taking on high risks for potentially higher returns.

FAQs