Conservative Hybrid Fund v/s Aggressive Hybrid Funds: Which is better?

Equity schemes are further categorized by market regular SEBI (Securities and Exchange Board of India) as large cap funds, mid cap funds, small cap funds, multi cap funds, ELSS (Equity Linked Savings Scheme) and hybrid schemes. The purpose behind this categorization is to help investors take an informed investment decision. Also, as per new SEBI regulations, fund houses cannot house multiple schemes that are similar in nature. Of the equity schemes stated above, hybrid schemes are gaining popularity among investors for a one particular reason and that their unique investment strategy.

What are hybrid schemes?

Hybrid funds are open ended mutual fund schemes that aim at generating capital appreciation over the long term by allocating a certain portion of their assets in both equity and debt. There are multiple schemes which invest in equity and debt depending on the investment objective of the scheme and its asset allocation strategy.

What are conservative hybrid funds and aggressive hybrid schemes?

A conservative hybrid fund as the name suggests, follows a conservative investment strategy. As per SEBI’s regulatory norms, a conservative hybrid fund must invest a minimum of 75 percent to 90 percent of its total assets in debt related instruments like treasury bills, debentures, company fixed deposits, government securities, corporate bonds, etc. On the other hand, an aggressive hybrid fundsanopen ended equity scheme that follow aggressive investment strategy by investing more in equity than debt instruments. An aggressive hybrid fund may invest anywhere between 65 percent to 80 percent of its total assets in equity related instruments while the remaining on the 20 to 35 percent of its assets in debt related fixed income securities and money market instruments. 

Which is a better hybrid scheme among the two?

By now you know that conservative schemes are more debt oriented whereas aggressive hybrid schemes are more equity oriented. Now when it comes to decision making and deciding which one to invest in, it is up to the individual who will be investing. It is essential for the investor’s investment objective to align with that of the scheme that they are about to invest in. For example, if you are someone who doesn’t want to invest more in equities and are alright with a scheme that is generating decent returns with minimal investment risk then you can consider investing in conservative hybrid fund. Conservative hybrid funds are more debt oriented and hence are known to provide cushion when the equity markets are underperforming. The debt element of the conservative hybrid fund provides cushion and might be able to recover the losses faced due to underperforming equities.

On the other hand, investors who are young aggressive and carry a moderately higher risk appetite can consider investing in an aggressive hybrid funds. Aggressive hybrid schemes might be a high volatile investment but at the same time it carries a high risk rewards ratio. This means although there are chances of your portfolio incurring losses over the short term, your might be able to earn a decent profit if you remain invested for the long run. Equity markets have historically generated decent capital gains as compared to conservative schemes.

Irrespective of which hybrid scheme you decide to invest in, it is better to first do some background check about the fund before investing. Investors can compare multiple schemes that fall in the same category in order to understand which is a better performing scheme. They can even start a monthly SIP to invest every month and benefit from compounding and similar investment tools. However, if you are new to investing or mutual funds in general, you are expected to first consult a financial advisor who might be able to help you take an informed investment decision.