Aggressive Hybrid Funds: A Balanced Approach to Investing

Individuals seeking moderate risk and smoother returns should consider aggressive hybrid funds . These funds capture gains from both equity market recovery and debt market appreciation, making a compelling choice for investors. These funds have an equity allocation ranging between 65% to 80% and debt having between 20% to 35%. The debt component of these funds becomes particularly advantageous during a rate-cut cycle. As bond prices generally rise when interest rates fall, the debt portion stands to benefit through capital gains, apart from regular interest income. The aggressive hybrid funds category has generated returns of 15% over a five-year period as compared with 15.5% for large-cap funds. The performance gap remains relatively modest—indicating that aggressive hybrids have managed to deliver competitive long-term returns despite their more conservative structure. Nehal Mota, co-founder and CEO, Finnovate, a wealth advisory firm, says aggressive hybrid funds allow fund managers to tweak the portfolio between equity and debt to ensure best risk-adjusted returns. “If you consider risk-adjusted returns, then clearly, aggressive hybrids score over diversified large-cap funds,” she says. In aggressive hybrid funds, the rebalancing can be opportunity-driven or valuation-driven. Fund managers will allocate more to equities if valuations are low and growth prospects for corporate earnings are bright. Similarly, they will enhance allocation to long-duration debt if interest rates are expected to fall. Fund managers may also use cash positions, modify the duration or credit mix within debt, or selectively add or remove stocks to maintain the target allocation. This active and systematic rebalancing helps maintain the fund’s risk–return profile and reduces volatility for investors. Nirav Karkera, head, Research, Fisdom, says individuals must maintain a minimum investment horizon of at least 3 years in aggressive hybrid funds. “This will allow the equity component to deliver meaningful growth while the debt portion helps cushion short-term market fluctuations,” he says. Before investing in aggressive hybrid funds, investors should evaluate the proportion of equity and debt to ensure it aligns with their risk profile and investment goals. They should also review the fund’s historical performance across market cycles, its expense ratio, and portfolio consistency. “It is important to assess the quality and credit risk of the debt portfolio, as well as the fund manager’s investment and rebalancing strategy,” says Swapnil Aggarwal, director, VSRK Capital. Investors must check returns of aggressive hybrid funds over longer time frames of five and 10 years and focus on the rolling consistency of returns.