Here is our recommendation list of aggressive hybrid mutual fund schemes in the new year. We are continuing with our 2019 recommendations this year, as all the schemes in the list are performing well. The three aggressive hybrid mutual fund schemes that were on the list managed to retain their slots.
As per Sebi norms, aggressive hybrid schemes have a mandate to invest 65-80% of their corpus in equity and 20-35% of the corpus in debt. These schemes are considered as equity mutual fund schemes for the purpose of taxation. That means, investments held in aggressive hybrid mutual funds for more than a year qualify for long-term capital gains tax of 10% on long-term gains of over Rs 1 lakh in a financial year.
For newcomers, do not take the term ‘aggressive’ literally. Ironically, these aggressive schemes are considered ideal for `conservative’ equity investors and new equity investors.
However, a word of caution: there is a lot of difference between `conservative equity investors’ and `conservative investors.’ Conservative equity investors have the necessary risk appetite to invest in stocks, but they still want to play it safe. A conservative investor, on the other, do not want to take any risk at all. S/he would be happy with bank deposits or debt mutual funds.
Many mutual fund advisors recommend aggressive hybrid schemes to new investors and very conservative equity investors, mainly because of the unique mixed portfolio composition of these schemes. These advisors reason that the mix of equity and debt offer stability to these schemes in times of volatility. The debt exposure offers a cushion to aggressive hybrid schemes when the market is in a volatile phase. An equity schemes that invest the entire corpus would be at the mercy of the market.
Why the stability is so important to new investors? Most new investors get nervous when they see their investment lose value sharply in a downturn in the market. Their instinct is to stop investing or abandoning their investment in such a testing time. The relative stability of aggressive hybrid schemes would offer some comfort to these investors, say mutual fund advisors.
Finally, if you are an extremely conservative equity investor looking to grow your investment without too much volatility over a long period, you should consider investing in aggressive hybrid schemes. Once again, please note that we are talking about conservative `equity’ investor here, not conservative investors. Conservative equity investor understands the risks involved in investing in stocks and okay with it, whereas a conservative investor is mostly looking for assured returns without any risk.
Here are our recommended aggressive hybrid schemes you may consider investing this year.
Best aggressive hybrid mutual funds to invest in 2020
SBI Equity Hybrid Fund
ICICI Prudential Equity and Debt Fund
Mirae Asset Hybrid Equity Fund
If you want to invest in these schemes, you may be interested to know how we chose these schemes. Take a look at our methodology:
ET.com Mutual Funds has employed the following parameters for shortlisting the hybrid mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii) When H is less than 0.5, the series is said to be mean reverting.
iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance
i) Equity portion: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}
ii) Debt portion: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
5. Asset size: For Hybrid funds, the threshold asset size is Rs 50 crore
[“source=economictimes”]