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Knowledge Centre

Aggressive Hybrid Funds

Aggressive Hybrid Funds fall in the category of hybrid schemes. These take exposure to both debt and equity securities in proportions specified in the scheme’s investment objective. As compared to Balanced Hybrid Funds, these funds have differences in asset allocation.

These funds aim at wealth accumulation over the long-term via a hybrid portfolio composition. These funds may be perceived as yielding higher returns at a relatively higher risk than standalone Balanced Hybrid Funds. The fund manager attempts to provide consistent returns by investing primarily in equity and a small portion in debt and money market instruments.

Characteristics of Aggressive Hybrid Funds:

Investment in equity and equity related instruments: between 65 per cent-80 per cent of total assets;

Investment in debt instruments: between 20 per cent-35 per cent of total assets.

Things to consider as an investor:

Risk: Along with debt instruments, aggressive hybrid funds are composed of equity shares as well which makes them moderately high risk investment opportunities. The net asset value (NAV) of the fund doesn’t fluctuate as much as that of pure equity funds. However, presence of low quality debt securities small-cap stocks may increase the risk profile of the portfolio.

Return: In spite of having an asset allocation of more than 20 per cent in debt and money market instruments, the returns are not guaranteed. A change in the overall interest rate in the economy might affect the fund returns by impacting the price of underlying debt securities. But compared to pure debt funds, these funds generate above average returns due to having exposure to arbitrage opportunities.

Compound Annual Growth Rate

The Compound Annual Growth Rate (CAGR) shows the rate of return of an investment over a certain period of time, expressed in annual percentage terms.

The easiest way to think of CAGR is to recognise that over a number of years, the value of something may change – hopefully for the better – but often at an uneven rate. The CAGR provides the one rate that defines the return for the entire measurement period. For example, if we were presented with year-end prices for a stock like:

  • 2015: INR 100
  • 2016: INR 120
  • 2017: INR 125

From year-end 2015 to year-end 2016, the price appreciated by 20 per cent (from INR 100 to 120). From year-end 2016 to year-end 2017, the price appreciated by 4.17 per cent (from INR 120 to 125). On a year-over-year basis, these growth rates are different, but we can use the formula below to find a single growth rate for the whole time period.

CAGR requires three inputs: an investment's beginning value, its ending value and the time period (expressed in years).

Plugging in the above values we get [(125 / 100)^(1/2) - 1] for a CAGR of 11.8 per cent.

Despite the fact that the stock's price increased at different rates each year, its overall growth rate can be defined as 11.8 per cent.

Diversification

Diversification is the practice of investing broadly across a number of different securities, industries or asset classes to reduce risk. Diversification is a key benefit of investing in mutual funds as they can offer diversification with a single investment.

Investment Horizon

Investment horizon is the term used to describe the total length of time that an investor expects to hold his / her investments.

As an investor, remember that your choice of level of risk and the investment horizon will play a decisive role to achieve your financial goals. Investment horizon is generally commensurate with the amount of risk that an investor is willing to undertake on their investment. Also, the investment horizon decides the investor's desired exposure to risk and income needs, all of which contribute towards the selection of investment product and the successful achievement of financial goals.

In general, investment horizon can be simply divided into short term, medium term and long term as below:

Short term

Typically, investment horizon of 1 day - 1 year can be assumed as short term. Your short term goals may be funded by low risk investments such as Cash (liquid) Funds and Low Duration funds so that you will have sufficient liquidity for your short term needs.

Medium term

Investment horizon of 1 to 5 years can be considered for this category. The financial goals to be achieved in say, 1 to 5 years could be termed as medium term goals. Medium term investment products can take relatively higher risk to provide reasonable returns.

Long-Term

Investment horizon of more than 5 years could be termed as long term. There are investment products and asset classes which can deliver consistent better risk adjusted performance over a long term. Your long term financial goals such as retirement planning or buying a holiday home could be supported by these long term investment horizon based products.

Large Caps and Mid Caps

Market cap or market capitalisation refers to the total value of a particular company's shares. It is calculated by multiplying the price of a stock by its total number of outstanding shares. Based on the market capitalisation, stocks are divided into three major categories viz., Large Caps, Mid-Caps and Small Caps.

SEBI (The Securities and Exchange Board of India) has defined the criteria for Large, Mid and Small Cap companies based on the market capitalisation of the listed companies on the stock exchanges as below:

Large Caps: Top 100 companies based on their full market capitalisation are known as Large Cap stocks.

Mid-Caps: Next 101 to 250 companies based on their full market capitalisation are known as Mid Cap stocks.

Small Caps: All the companies beyond the above 250 companies based on their full market capitalisation are called Small Cap stocks.

Mutual Funds adopt the list of Large, Mid and Small Cap companies as prepared by Association of Mutual Funds in India (AMFI).

New Fund Offer

NFO or a New Fund Offer is a new opportunity for investors to invest at the inception of the new mutual fund scheme. An NFO is the offer for a new mutual fund scheme that is being launched by the mutual fund.

Rupee Cost Averaging

Rupee cost averaging is a method in which you invest a fixed amount of money at regular intervals. This in turn ensures that you buy more units of a particular mutual scheme when prices are low and lesser units when they are high. This in turn helps you average out the cost of buying a unit.

When you invest through Systematic Investment Plans (SIPs) you automatically get the benefit of Rupee cost averaging since you invest a fixed sum of money every month at different Net Asset Value (NAV) which helps you in averaging the cost of your investments.

Let’s understand this with an example

Month Amount invested each month (INR) Price of each unit (INR) Price of each unit (INR)
1 1,000 15 67
2 1,000 18 56
3 1,000 22 45
4 1,000 25 40
5 1,000 20 50
6 1,000 17 59
7 1,000 12 83
8 1,000 18 56
Total INR 8,000 18.375  

So as we can see, by investing periodically every month, the average cost of investing is INR 18,375.

Hence it is advisable to invest periodically every month as opposed to a lump sum. While rupee cost averaging doesn't guarantee profits or hefty returns, it certainly demonstrates how a systematic approach to investing can prove highly effective in creating wealth over the long-term. Hence start investing through SIP and see how you can average out your cost of investments.