Best aggressive hybrid mutual funds to invest in 2019

The categorisation and rationalisation exercise of Sebi has created some new mutual fund categories. Aggressive hybrid scheme category is one such category. Prior to the re-categrosiation exercise, these schemes were known as equity hybrid schemes or balanced schemes.

However, Sebi has created and clearly defined seven hybrid schemes: aggressive hybrid, conservative hybrid, balanced hybrid, dynamic asset allocation or balanced advantage, multi asset allocation, arbitrage and equity saving schemes.

If you wan to know more about hybrid schemes, read: All you need to know about new hybrid mutual fund categories

Aggressive hybrid schemes are mandated to invest 65-80 per cent of their corpus in equity and 20-35 per cent of the corpus in debt. As you may have noticed, they almost follow the investment strategy of erstwhile balanced or equity hybrid schemes. The minimum equity investment limit of 65 per cent qualifies them as equity schemes for tax treatment. The Sebi has now clearly defined how much theses schemes can invest in both equity and debt.

Do not let the term 'aggressive' mislead you. Many mutual fund advisors recommend aggressive hybrid schemes to new investors and very conservative equity investors. They reason that the unique mixed portfolio composition of equity and debt offer stability to these schemes in times of volatility. The debt exposure offers a cushion to aggressive hybrid schemes when the market is in a volatile phase. An equity schemes that invest the entire corpus would be at the mercy of the market.

Why the stability is so important to new investors? Most new investors get nervous when they see their investment lose value sharply in a downturn in the market. Their instinct is to stop investing or abandoning their investment in such a testing time. The relative stability of aggressive hybrid schemes would offer some comfort to these investors, say mutual fund advisors.

Finally, if you are an extremely conservative equity investor looking to grow your investment without too much volatility over a long period, you should consider investing in aggressive hybrid schemes. Please note we are talking about conservative `equity’ investor here, not conservative investors. Conservative equity investor understands the risk involved in investing in stocks and okay with it, whereas a conservative investor is mostly looking for assured returns without any risk.

Here are our recommended aggressive hybrid schemes you may consider investing this year.

Best aggressive hybrid mutual funds to invest in 2019

Principal Hybrid Equity Fund

SBI Equity Hybrid Fund

ICICI Prudential Equity and Debt Fund

Canara Robeco Equity Hybrid

Mirae Asset Hybrid Equity

If you are invested to know how we chose these schemes, here is our methodology:

Our methodology
ET.com Mutual Funds has employed the following parameters for shortlisting the Hybrid mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii) When H is less than 0.5, the series is said to be mean reverting.
iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z

4. Outperformance
i) Equity portion: It is measured by Jensen's Alpha for the last three years. Jensen's Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.

Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index - Risk Free Rate}

ii) Debt portion: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.

5. Asset size: For Hybrid funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)