Mutual funds are great investment vehicles for steady growth. Rahul, a young IT professional, wants to invest his money in mutual funds but wants better returns. He does not want to invest in full equity funds, but he wants a higher return potential. He is not afraid of taking risks. So, how can he navigate investment options?
Investors with a higher risk tolerance, like Rahul, can invest in aggressive growth mutual funds. It is a hybrid fund, where fund managers invest more in equity and less in debt funds. In this blog, we will explore this investment avenue in more detail.
Understanding Aggressive Growth Mutual Funds
The growth of mutual funds in India is evident from the increase in the number of assets under the management of mutual funds. Compared to 2014, when the assets under management (AUM) were just Rs. 9.03 trillion, AUM in India has grown by 6X, reaching Rs. 52.74 trillion. This allows fund houses to explore many asset options to manage with mutual fund schemes. Aggressive growth funds invest in equity shares of companies with higher growth potential, along with debt instruments.
Generally, aggressive growth funds purchase the initial public offering (IPO) of growing companies and sell those later for huge profits. Sometimes, these funds also invest in derivatives to boost gains. Fund managers can change allocations dynamically based on market fluctuations to take advantage of the upswings. A note of caution here: these aggressive mutual funds take a massive hit during downturns.
Features of Aggressive Growth Mutual Funds
Due diligence is crucial when investing in growth stock mutual funds. Investments are made in growth stocks, hoping that the company grows at a rate faster than the overall stock market. The performance of the growth fund is compared against the industry benchmark index or other markets to invest in. The fund manager is responsible for choosing such investments.
Some of the features of aggressive mutual funds are:
- Higher returns – Growth stocks have higher return potential. When fund managers invest in high-growth companies, the investors can benefit.
- Medium tenure – Generally, the aggressive hybrid funds are suitable for medium-term tenure. Higher-risk investments are not suited for the short term.
- Equity heavy portfolio – As most of the investment is made in equity funds, the portfolio will have a heavy concentration of equity investments.
- Higher risk – Whenever there is higher return potential, there is a high risk involved. Aggressive growth mutual funds carry huge risks that can result in huge gains or massive losses based on market movements.
Benefits of Investing in Aggressive Growth Mutual Funds
Investing in growth stocks as a long-term strategy can work in your favour. When the market performs poorly, the debt instruments will cushion the losses. Have a look at some of the benefits of investing in aggressive growth stock funds:
- Diversification – As hybrid funds invest in different types of growth stocks, they provide the most desired equity diversification for investors. A large portion of the risk can be controlled with diversified assets.
- Rebalancing – Fund managers must maintain at least 20% of investments in debt instruments for aggressive hybrid funds. So, asset allocation will always be under the prescribed limit. Automatic rebalancing will happen with these funds to capitalize on market volatility. For example, in bull markets, these funds invest more in growth equity stocks. With bearish signals, investments will be reallocated to debt instruments for optimal rebalancing.
- Relatively lower volatility – Compared to equity funds, aggressive funds are less volatile as they invest in debt instruments. The debt part will help with minimizing losses during a bear market.
Who Should You Invest in Growth Stock Mutual Funds?
You must always choose your investment vehicle based on your risk tolerance. If you are risk-averse, aggressive hybrid funds are not for you. However, if you expect higher gains but want to avoid risking it all with equity funds, aggressive growth mutual funds are right for you.
Ensure that you find fund houses that evaluate companies based on growth trajectories. Investors with a high-gain and high-risk preference can improve equity allocation in their portfolio with growth stock mutual funds.
Points to Remember for Aggressive Growth Mutual Funds
Every investor hopes for larger gains, but remember these points before you invest in aggressive hybrid funds that allocate more to growth stocks:
- Define your investment goal – Based on your financial goal, determine your investment goal and tenure. Aggressive growth stocks can give you high rewards at a high risk. Even though there will be allocations in debt instruments, economic downturns can impact the profitability of these funds.
- Understand the risk factor – Different types of mutual funds have different risk factors. For example, Quant Focused Fund Direct-Growth with a 3Y year of 26.49% has a higher risk than JM Focused Direct Plan–Growth with a 3Y return of 20.76%. Before investing, thoroughly understand the risk parameters.
- Fund performance history – Always study the history of fund performance to choose suitable funds. The performance data will give insight into whether the fund can meet your financial objectives.
- Expense ratio – The fees that fund houses charge to handle administrative expenses of mutual funds are called expense ratio. As growth stock mutual funds involve dynamic rebalancing, this fee can consume a significant portion of your profits.
- Taxability – The returns you gain from aggressive growth mutual funds are considered equity fund returns. So, Short-Term Capital Gains (STCG) for redeeming within one year of investing is taxable at 15%. Long-term Capital gains (LTCG) for redemption after one year are taxed at 10% if gains are more than 1 lakh. For LTCG, gains under 1 lakh are tax-free.
Conclusion
Compared to traditional equity funds, aggressive growth mutual funds are less risky because a portion of the investment is invested in debt instruments, per SEBI guidelines. As these funds have a high risk and high return potential, investors must pay more attention to the risk metrics. Study the fund manager who handles these funds and ensure you only trust experts.
FAQs
Aggressive growth funds carry high risk, but compared to pure equity funds, they have lower risk as allocation must be done in debt instruments, too.
The ideal time horizon is medium-term, 3-5 years for aggressive hybrid funds. This allows you to balance losses while also profiting from market upswings.
Only a small portion of allocation is done for debt instruments. Growth equity fund returns rely heavily on market performance. So, aggressive funds are not ideal if you want to generate a fixed income.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.