Here is a list of top 5 Balanced / Hybrid Aggressive mutual funds that you can look at investing in 2018-19.
Balanced Funds, in accordance with their name, try to bring in a balance in the portfolio by investing in both equity and debt instruments. They are also known as Hybrid Funds.
A hybrid fund is suitable for intermediate-term investors with moderate risk appetite looking for income generation and capital appreciation from their investments.
A hybrid or balanced fund aims to reduce equity market risk, by taking considerable exposure to bonds. However, the percentage of exposure to equity and debt depends on the attributes of the fund.
With the implementation of the recent SEBI circular on the categorization of mutual funds, the hybrid funds have been divided into 7 distinct categories based on their asset allocation. Out of the 7, Aggressive Hybrid Fund and Balanced Hybrid Fund categories are identified as equity-oriented hybrid funds, which does not permit arbitrage or hedging.
In this article, we are going to discuss the top 5 funds in the Aggressive Hybrid Fund category. Funds under this category are allowed to invest in equities and equity-related instruments between 65%-80% of the total assets, and between 20%-35% in debt instruments.
All the schemes under this category use either CRISIL Hybrid 35+65 Aggressive or Nifty 50 Hybrid Composite Debt 65:35indices as the benchmark.
Risk and Returns of Hybrid Aggressive Funds
These funds usually have a lesser risk as compared to pure equity funds and better downside protection. The lower standard deviation of hybrid equity-oriented funds as compared to equity funds indicate less volatility.
Depending on the market outlook, the fund manager may take more exposure to equity for better returns or may increase debt investments during a market downturn. Hence, these funds are preferred by investors who want to make better returns through equities and also protect their returns by investing in debt.
On the returns front, these funds may not fare as equity funds during a bull market. However, during a bear market, than equity funds.
Taxability
Since Aggressive Hybrid Fund has an exposure of 65% or more to equity, it is considered as equity fund for tax purpose. If the units are redeemed after a holding period of 1 year, the gains are subject to Long-Term Capital Gains at the rate of 10% of the gains made, above Rs.1 lakh. If the units are sold before one year from the date of purchase, it is subject to Short-Term Capital Gains at the rate of 15%.
Also read: Best Balanced Funds for 2017
Top 5 Hybrid Aggressive Funds for 2018-19
To arrive at the top 5 funds, we have analyzed the returns of the scheme over a long-term of at least 5 years. A scheme that has weathered multiple bear markets and has managed to beat the benchmark returns over a long-term carries more weight than a scheme which is currently generating the highest returns.
We have given due importance to qualitative factors like asset allocation and quantitative factors such as expense ratio, standard deviation, beta, Sharpe Ratio, Sortino Ratio, Alpha etc. These factors are the right indicators of the performance of the fund rather than AUM size and NAV of the scheme.
Standard Deviation indicates how volatile the returns of a fund is. Beta is a measure of how volatile a fund is as compared to the market. Higher the beta, higher is the risk of the fund.
Sharpe Ratio indicates how much returns can a fund generate for every additional unit of risk taken. Sortino Ratio is a measure of risk-adjusted returns of a scheme. Alpha indicates how much excess returns a fund has been able to generate for every unit of risk taken.
Apart from the qualitative and quantitative factors used to select a scheme, we have also considered the below criteria to arrive at the top 5 funds.
- Only those funds which have been categorized as Hybrid Aggressive have been considered.
- Solution-oriented funds such as Retirement Funds or Children’s Funds that come with a lock-in period have been excluded even if they follow the same asset allocation strategy.
- Stability of the fund house and the performance of the scheme over a long-term have also been considered.
The funds listed above are not in hierarchical order. You have to choose a fund that is suitable for you based on your risk profile and suggested asset allocation for your portfolio.
Let us analyze the above funds from various factors.
Returns
Over a 10-year timeframe, HDFC Balanced Fund and ICICI Prudential Balanced Fund have given an excellent return of 15.48% and 12.89% respectively, well above the category average of 10.75%. Both have managed to perform well despite enduring the worst bear market phases of 2001 and 2008.
Over a 5-year period, HDFC Balanced Fund and L&T India Prudence Fund have given a high return of 19.5% and 19.25% respectively, well above the category average of 16.32%. However, L&T India Prudence Fund has not endured worst bear market cycle as in 2008.
Principal Balanced Fund is the best performer in the 3-year time frame. It has weathered the bear markets in 2001 as well as in 2008 and has managed to give good returns.
Expense Ratio
Lower expense ratio means that greater amount of your money gets invested and you get more returns. Among the top 5, SBI Magnum Balanced Fund and L&T India Prudence Fund have the lowest expense ratios.
Risk
The risk of a mutual fund scheme is measured by standard deviation and various financial ratios such as beta, Sharpe ratio, Sortino Ratio etc. Let us analyze the top 5 funds from the risk perspective.
Standard Deviation
Out of the 5 funds, Principal Balanced Fund has the highest standard deviation of 11.76, indicating that the returns can oscillate between -11.76% to +11.76% from its historical mean return. This is suitable if you want to take higher risk.
SBI Magnum Balanced Fund has a low SD of 9.5 and is suitable if you are looking for a fund which has less risk.
Beta
Principal Balanced Fund has a beta of 1.01 which is one of the highest in its category. You can choose this fund if you don’t mind taking higher risk for better returns.
HDFC Balanced Fund, ICICI Prudential Balanced Fund,andL&T India Prudence Fund have a beta slightly lower than the market risk and can be considered if you want to take a slightly higher risk.
SBI Magnum Balanced Fund has the lowest risk with a beta of 0.8.
Sharpe Ratio
Principal Balanced Fund has a high Sharpe ratio of 0.89 indicating that for every unit of risk taken, you can get 0.89 times excess return.
HDFC Balanced Fund, ICICI Prudential Balanced Fund,andL&T India Prudence Fund have almost equal Sharpe ratios and can be considered if you want to take moderate risk.
SBI Magnum Balanced Fund has a lower Sharpe ratio of 0.65 among the 5 listed funds.
Sortino Ratio
Principal Balanced Fund has a high Sortino ratio among the top 5 at 1.22. It indicates that it can generate 1.22 times risk-adjusted returns as compared to others.
SBI Magnum Balanced Fund has the lowest Sortino ratio among the top 5, measuring 0.93. The fund takes the lesser risk and hence, the risk-adjusted returns are also less.
Alpha
Principal Balanced Fund
SBI Magnum Balanced Fund has the lowest alpha at 3.43. The other 3 funds – HDFC Balanced Fund, ICICI Prudential Balanced Fund,andL&T India Prudence Fund have been able to generate a considerable alpha of 4+ for every unit of risk they take.
What has changed from 2017?
Our list of the top 5 balanced/hybrid (equity-oriented) funds of 2018 has not changed much from that in 2017. The only missing fund in the top 5 is Tata Retirement Savings Fund – Moderate Plan. This has not been considered as it has been categorized as a solution-oriented scheme and also mapped to a different benchmark index.
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Final Words
If you want better returns and you are willing to take higher risk, you can invest in Principal Balanced Fund. If you are willing to take a moderate risk and want to make a fairly decent return, you can choose any of the three – HDFC Balanced Fund, ICICI Prudential Balanced Fund and L&T India Prudence Fund. SBI Magnum Balanced Fund is the best if you want a low-risk fund and want to make good returns over a long term.
A lot of investors opt for extended goals that give them a little cushion as far as time and financial issues. Opting for a longer plan will give the investor more time to make the money back and more. Make sure that you have outlined all of the risks and benefits of an investment before you take on any investing. You should go over your initiatives and concerns with you financial advisor so that you are aware of which appreciation mutual funds are best for you. Financial advisor at Marwadi Shares and Finance Limited http://www.marwadionline.com will help you to understand why the funds are the best aggressive growth mutual funds.