Decoding asset allocation can be a daunting task for many investors especially for those who are new to managing investments. Unsurprisingly, it is common for asset allocation to get pushed to the backburner with investors pumping money under emotional influence, in assets without taking into consideration the right risk-reward equation that matches with their financial goals and abilities.

No two asset classes have exactly the same risk quotients. While returns and risk and interlinked, the latter is a double-edged sword – too little risk can hinder your progress with respect to attaining financial goals and extreme risk-taking can leave you overly exposed to the volatilities of capital markets and even land you in situations where your long term financial well-being can be compromised. The right asset allocation formula should maintain risks at optimal levels so that you can comfortably achieve your goals without making your finances too vulnerable to the vagaries of stock markets.

Aggressive hybrid funds can be a suitable investment option for those who are either wary of investing heavily in pure equities because of the high risks or for whom the dynamics of equity investments remains an elusive concept. With these funds, the majority of the investment is made in stocks with a limited allocation to debt securities making them less risky than pure equities. SEBI norms mandate these funds to invest 65 – 80% of their assets in equity or equity related securities and rest in money market or debt securities.

When it comes to generating high returns and meeting capital appreciation targets, equities as an asset class are the most promising but the high risk factor makes many in the investment community hesitate at the thought of heavy equity investments. On the other hand, debt instruments are much safer and while they may not fare as highly as equities when it comes to returns, they lend stability which can shield your portfolio when the markets are in a tailspin and they can also be sources of regular income.

Owing to this unique distribution pattern, aggressive hybrid funds are suitable for investors who want to either try their hand at equity investments but are averse to the high-risk factor or those who want to optimize wealth creation but without relying entirely on stocks. The debt components in aggressive hybrid funds ensure that during episodes of market corrections, your portfolio doesn’t end up in a bloodbath.

Another advantage of investing in aggressive hybrid funds is that the current norms mandate a rigorous rebalancing exercise – fund managers have to maintain the, asset allocation within the limits specified by SEBI. Hence when the markets are witnessing an upswing and the equity holdings increase in these funds, fund managers sell some stocks to bring down the equity weightage to the specified limits. This spares you of the trouble of having to manage your investments constantly when the market moves so that the risk factor does not ascend. What’s more, aggressive hybrid fund investments help with diversification because your investment will not be confined to one asset class.

Since aggressive hybrids funds are equity-heavy, they are a good fit for meeting your medium to long term goals. An investment horizon of 3-5 years is sufficient to allow the fund to receive its full potential.

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