An aggressive growth fund is a mutual fund that aims to achieve capital gains through investments in stocks of companies poised for substantial growth. These funds typically hold shares of companies with high growth potential, which also entails higher levels of risk.
Hybrid funds work in an area between the two extremes, i.e., between pure equity and pure debt funds. There can be many ways a hybrid scheme can be designed to be able to capture investment opportunities in both the asset classes. Most hybrid funds vary the percentage of funds allotted to equity to accomplish the objectives of the fund. However, to clearly demarcate a balanced hybrid fund with up to 60% exposure to equity from those with higher exposure, SEBI introduced a new hybrid fund category called aggressive growth mutual fund.
This is where we take a walk through the aggressive growth mutual fund and talk about a few of the important aspects that you should be aware of concerning the same.
What is an aggressive growth fund?
Aggressive growth mutual funds are a kind of hybrid mutual fund in which 65%-80% of total assets are invested in equity and related instruments. The balance 20%-35% is to be invested in debt securities and money market instruments. Generally, hybrid funds of the balanced approach are not allowed to take benefits out of an arbitrage opportunity, even if the fund manager is sure of fetching potential returns.
Note: Arbitrage is the trading of security in one market at a cheaper price to sell it in another market at a relatively higher price. The target is to benefit from the differential in price.
Most aggressive growth mutual funds offer much more freedom to the fund managers than balanced funds. As such, an Aggressive Fund can make use of arbitrage opportunities. Further, the fund manager can decide on whether to follow the growth or value investing style while making the selection of stocks. Also, in the process of selecting debt securities, the fund manager may have to make a choice about securities that have different sensitivity to changes in interest rates.
Understanding aggressive growth funds with example
Aggressive Growth Funds are specialised mutual funds that aim for high capital appreciation by investing predominantly in stocks of companies that have high potential for growth and earnings. These funds typically engage in high-risk investment strategies, focusing on equities that promise above-average growth rates but also carry a higher potential for volatility.
For example, a typical Aggressive Growth Fund might allocate a significant portion of its portfolio, say 65% to 80%, to high-growth equities such as technology or biotech firms. The remainder could be invested in debt instruments or other securities that offer some income stability, balancing the risk somewhat. However, the primary goal remains capital growth, not income generation or capital preservation. The fund managers of such portfolios are often given the flexibility to adjust the asset allocation dynamically based on prevailing market conditions to maximise returns or mitigate risks during downturns.
These funds are best suited for investors who have a high tolerance for risk and a longer-term investment horizon, as they may experience considerable fluctuations in value due to their aggressive investment stance. For instance, in a bullish market scenario, fund managers might increase equity exposure to capitalise on rising markets, whereas, in a bearish phase, they might increase the proportion of debt to buffer against losses.
Investors considering Aggressive Growth Funds should be prepared for periods of high volatility and should have a time frame that allows them to stay invested through market cycles, typically for more than three years, to ride out the inherent short-term fluctuations and achieve potential gains.
High-return mutual fund categories for smart investing
Features of aggressive growth funds
The key features of the fund include the following:
- Returns and tenure: These funds are good for medium-term goals, subject to the volatilities and market corrections that affect profitability.
- Investment portfolio: These funds bear a very high-risk profile since they are majorly concentrated in equities. As such, it wouldn't be suitable for any investor willing to avoid or not be exposed to such risks.
- Risk: As the name says, these kinds of funds prove to be highly risky in the mutual fund environment.
Advantages of investing in aggressive growth funds
Investing in aggressive growth funds offers several advantages for investors seeking substantial capital gains, particularly those with a higher risk tolerance and a long-term investment perspective:
1. High return potential
Aggressive growth funds primarily invest in stocks with high growth potential, which can lead to substantial returns, especially in bullish market conditions.
2. Professional management
Fund managers of aggressive growth funds are experienced in dynamically managing portfolios, making informed decisions on buying and selling equities based on market analysis and growth projections.
3. Flexibility in asset allocation
These funds have the flexibility to adjust their asset allocation between equities and debt, depending on market conditions. This dynamic rebalancing helps in managing risk while aiming for optimal returns.
4. Tax benefits
Like other equity-oriented funds, aggressive growth funds benefit from favourable tax treatment on long-term capital gains, which can enhance the overall returns for investors who hold their investments for longer periods.
5. Suitable for risk-tolerant investors
They are an excellent option for investors who are willing to accept higher levels of volatility and risk in exchange for the possibility of higher returns and rapid capital appreciation
How will you know if your fund is aggressive growth?
To determine if your mutual fund is classified as an Aggressive Growth Fund, you can look for several indicators that typify this type of investment:
1. High equity allocation
Aggressive growth funds typically allocate a substantial portion of their assets to equities, often between 65% to 80%. This high concentration in stocks is aimed at capital appreciation, which involves higher risks but offers higher potential returns.
2. Investment objective
These funds aim to achieve high capital gains and will often invest in sectors and companies with high growth potential such as technology or innovative industries. The objective is clearly stated in the fund's prospectus or fund information documents.
3. Risk profile
Aggressive growth funds carry a high-risk profile due to their focus on equities, which are more volatile than other asset classes like bonds or money market instruments. This type of fund is suitable for investors with a high-risk tolerance and a long-term investment horizon.
4. Management style
Look for actively managed funds where the fund manager frequently buys and sells stocks to capitalise on market opportunities. Aggressive growth funds are less likely to be passively managed as they aim to outperform market indices rather than simply tracking them.
5. Fund performance and volatility
These funds typically show higher volatility and significant fluctuation in returns, reflecting their aggressive investment strategy. Comparing the fund's performance during different market conditions can provide insights into its risk and growth characteristics.
Who can invest in an aggressive growth fund?
Investing in an aggressive growth fund is best suited for investors who can tolerate high levels of risk and are seeking substantial capital appreciation. These funds are ideal for individuals with a long-term investment horizon, allowing them to ride out the inherent market volatility associated with high-growth equities. Aggressive growth funds are generally recommended for younger investors or those who have a sufficient time frame to recover from potential market downturns. Additionally, these investors should have a robust financial foundation, enabling them to absorb possible short-term losses without compromising their overall financial stability.
Why are aggressive growth funds associated with high risk?
Aggressive growth funds are associated with high risk primarily due to their heavy focus on equities, particularly in sectors and companies expected to exhibit high growth rates. These investments often involve emerging or highly innovative industries, which can be more volatile and susceptible to market fluctuations. The risk is also amplified by the fund managers' strategies, which involve active trading to capitalise on market opportunities, potentially leading to significant price swings. Additionally, these funds aim for high returns, which inherently come with higher risk exposure as they seek to outperform standard benchmarks.
What is the significance of investing in aggressive growth funds?
Investing in aggressive growth funds holds significant importance for investors seeking substantial capital growth over the long term. These funds target high returns by investing predominantly in equities of companies with potential for rapid growth, often in sectors like technology and biotech. The potential for high returns attracts investors willing to take on higher risk and who have a longer investment horizon, allowing them to benefit from the compounding effect of gains over time. Such investments are particularly appealing to those looking to maximise their investment returns in preparation for long-term financial goals, such as retirement.
What you should be aware of regarding aggressive growth funds?
When considering investing in aggressive growth funds, you should be aware of several key aspects:
- High volatility: These funds typically experience higher levels of volatility due to their focus on high-growth sectors like technology or emerging markets, which can be significantly affected by market movements.
- Risk profile: Aggressive growth funds carry a higher risk as they aim for higher returns. This makes them suitable primarily for investors who have a high risk tolerance and a long-term investment perspective.
- Market timing sensitivity: The performance of aggressive growth funds can be heavily influenced by timing in the market. Entry and exit times can significantly affect investment outcomes due to the volatile nature of the assets within these funds.
- Cost factors: These funds often have higher expense ratios due to active management and the high transaction costs associated with frequent buying and selling of equities.
- Long-term investment horizon: These funds are generally not suitable for short-term investments. They are designed for investors who can remain invested for a longer duration to ride out market ups and downs and benefit from the potential growth of their investments.
Conclusion
Investing in aggressive growth funds has its perks and pitfalls. On the plus side, these funds offer a balanced portfolio by mixing high-risk and low-risk assets, which helps smooth out the investment's overall volatility. They're generally less volatile than pure equity funds because they also invest in debt instruments, offering some stability during market dips. Plus, they come with tax advantages similar to those of equity funds, where long-term gains are taxed at a favourable rate.
However, they do carry more risk and volatility compared to more conservative investments because of their significant equity component. This might make them less appealing for those who prefer low-risk investments or need steady income. For those interested in investing, aggressive mutual funds can be accessed through platforms like Bajaj Mutual Fund Platform, with over 1000+ mutual fund schemes where one can sign up, complete the KYC process, and start investing through systematic investment plans (SIPs) or lumpsum payments.
It's crucial for investors to understand their own risk tolerance and investment horizon before opting for aggressive growth funds, as these funds generally require a longer-term commitment to realise potential gains.