Aggressive Mutual Funds – Features, Suitability, Advantages and Disadvantages

What are Aggressive Mutual Funds?

Aggressive Mutual Funds are defined as hybrid funds that invest 65-80% of their total assets in equities and equity-related instruments, with the remaining 20-35% in debt securities and money market instruments. When compared to balanced funds, most aggressive mutual funds provide substantially greater authority to fund managers. As a result, Aggressive Funds can profit from arbitrage opportunities. Even if the fund management is certain to earn strong returns, hybrid funds with a balanced approach are often not permitted to take advantage of any arbitrage possibilities.

Arbitrage is the process of buying a security at a cheaper price in one market and selling it at a higher one in another. The goal is the profit from the price difference.

Furthermore, while selecting stocks, the fund manager can choose between growth and value investment styles. In addition, while selecting debt securities, the fund manager has the option of selecting securities with variable sensitivity to interest rate fluctuations.

Features of Aggressive Mutual Funds

1. Funds Allocation: Due to their equity-heavy allocation, these funds have a high-risk profile. It makes them unsuitable for risk-averse investors.

2. Risk: Despite the risk, aggressive funds have the potential for higher returns by allocating more funds to equities while providing stability through the debt component.

3. Profitability: These funds are ideal for medium-term goals, but volatility and market corrections might have an influence on profitability.

4. Expense Ratio: Aggressive funds charge a fee for the fund management services they provide. Comparitively expense ratio of agreesive funds are higher than other mutual funds.

Who Should Invest in Aggressive Funds?

These funds are best suited for investors seeking maximum financial returns without the risk level of other equity funds. The risk associated with aggressive growth mutual funds is quite significant. While the portfolio includes debt instruments, making these funds less risky when compared to other equity funds, they are nevertheless considered high-risk high-return funds. Aggressive growth funds invest in firms that have strong growth prospects. This is why these funds outperform regular growth funds. Investors with a high-risk, high-gain appetite who desire to grow their portfolios through large capital gains can participate in these sorts of funds.

1. Long term investors: Investing in such funds might be an excellent alternative for people who aim to stay invested for a long period of time (usually five years) because these funds are likely to generate substantial returns over a longer period of time.

2. Investors with High Risk Appetite: Though these funds strive for consistent income and long-term wealth growth, they hold a hybrid portfolio, which means you are also vulnerable to hazardous equities. For their stability, aggressive funds prioritise equity and equity-related securities, with lesser percentages in debt. As a result, these funds can meet the investing objectives of risk-taking investors.

Factors to Consider Before Investing in Aggressive Mutual Funds

1. Assess the Risks and Returns: Aggressive Funds are considered moderately-high risk investments due to their equity exposure of 65-80%. The risks associated with aggressive funds are fewer than those of a pure equity fund since they have a 20-35% exposure to debt securities and money market instruments. Furthermore, the inclusion of small-cap equities in the equity portfolio or low-quality debt securities might enhance investment risk. Returns are proportional to the portfolio’s stock and security selection.

2. Expense Ratio: Aggressive funds charge a fee for the fund management services they provide. This is referred to as an expense ratio. A higher expense ratio might reduce profitability. As a result, you should look for schemes with low expenditure ratios. Furthermore, if the scheme has a high level of trading activity, the expenditure ratio will be high due to increasing expenses. Keep this factor in mind while choosing a scheme.

3. Selecting the Right Aggressive Fund: Before you begin looking at the different aggressive funds available, you should examine your financial goals, risk tolerance, and investment horizon and develop an investing strategy. This will allow you to select the plan that fits best with the rest of your financial portfolio to help you achieve your goals.

4. Aggressive Fund Taxation: Aggressive funds are taxed in the same way as equity funds, with the following tax rules:

1. Long-term capital gains (LTCG) of more than ₹1 lakh are taxed at 10%, irrespective of indexation.
2. STCG (short-term capital gains) are taxed at 15%.

Taxability of Aggressive Mutual Funds

In terms of taxation, aggressive growth funds are classified as equity funds. Capital gains received within one year are classified as Short Term Capital Gains (STCG) and are taxed at 15%.

If an investor holds investments for more than a year, the earnings are categorised as Long Term Capital Gains (LTCG) and free if profits fall under one lakh and are taxed at 10% if the profits exceed one lakh. Dividend profits from these funds are normally added to the investor’s income and taxed based on their tax rate. TDS will be applied if these gains exceed ₹5,000.

Advantages of Aggressive Mutual Funds

1. Diversification : Debt and equities are two categories of assets that are included in the portfolio of aggressive funds. High-risk, high-reward as well as low risk, low reward asset categories are also included. These plans therefore provide diversity. Debt securities can protect investors’ portfolio value during a correction, even when the equity component might yield huge returns.

2. Tax Benefits : An aggressive mutual fund will invest up to 35% of its assets in debt instruments and at least 65% in equities. Since a significant portion of their portfolio is made up of assets that provide fixed income, they are still eligible to benefit from equity taxation under current tax legislation.

3. Less Volatile than Pure Equity Funds: When the underlying securities’ prices fluctuate, fluctuating market circumstances have an impact on the performance of pure equity funds. However, aggressive funds are less affected by market volatility because they also allocate up to 35% of their assets to debt instruments.

4. Portfolio Rebalancing: Due to SEBI guidelines, aggressive mutual funds have strict asset allocation policies. Fund managers have the ability to adjust the fund’s portfolio based on fluctuations in the market. They can raise their debt instrument investments to hedge risk in a bad market while maintaining the allocation percentage within the predetermined range. In contrast, fund managers might boost stock investments in a bull market in order to optimise profits.

Disadvantages of Aggressive Mutual Funds

1. Entry or Exit Load: There are mutual funds that impose an entry load, an exit load, or both. The major reasons they collect this fee are to keep their business running and cover employee salaries. Occasionally, the fee might reach a maximum of 3% of the total amount invested. It typically stays at 1%, though.

2. Diversification Might Cause Lower Profits: Although loads on mutual funds may appear like one of their biggest disadvantages, funds with high loads typically yield returns that are far higher than those of average mutual funds. Therefore, you should consider the fund’s past performance before making a decision, even if the load will undoubtedly reduce your earnings.

3. Difficult Phases: Even while long-term investors almost never lose money, if you invest before a bad period then you can have to bear a capital loss. Returns on mutual funds are never certain. It is therefore advisable to have some knowledge about the fund industry and the economy before making an investment.

4. Liquidity: Some mutual funds are of fixed maturities such as ELSS funds. ELSS usually has a three-year lock-in period. The lock-in period for a fixed maturity plan also varies according to the investment instrument it uses. You are not allowed to withdraw the units before the fixed period.