Aggressive hybrid funds can be a useful mutual fund category for investors seeking equity-like growth with some downside protection. These funds invest 65-80 per cent of their portfolios in equities, with the balance allocated to debt instruments.

However, aggressive hybrid funds are far from uniform. Differences in asset allocation, market-cap preferences and portfolio management styles can lead to significant variations in risk and return. For instance, PGIM India Aggressive Hybrid has stayed near the lower end of the equity range, averaging about 66 per cent in equities over the last five years, whereas Aditya Birla SL Equity Hybrid ‘95 has maintained over 75 per cent equity exposure. Shriram Aggressive Hybrid Fund and Navi Aggressive Hybrid Fund follow a more dynamic approach within the permitted range.

Market-cap preferences vary just as widely. ICICI Prudential Equity & Debt and Quant Aggressive Hybrid lean heavily towards large-caps, while HSBC Aggressive Hybrid Fund and JM Aggressive Hybrid Fund maintain a mix across market capitalisations.

Standing entirely apart is Bank of India Mid & Small Cap Equity & Debt Fund (BEDF). It is the only fund in the category that completely avoids large-cap stocks, investing its entire equity portfolio in mid- and small-cap companies. This makes BEDF a distinct proposition, offering the downside buffer of a hybrid structure alongside the high-growth, high-volatility characteristics of a pure mid- and small-cap strategy.

Its mid- and small-cap focus has delivered. The fund has compounded at 15 per cent annually since its launch in July 2016. However, with no large-cap anchor, it tends to be more volatile than most hybrid peers during market downturns. It is, therefore, suited to investors with a high risk appetite and a long investment horizon, rather than those seeking stability from a hybrid allocation.

Mid- and small-cap orientation

Over the past five years, the fund has typically maintained 70-78 per cent of its portfolio in equities, with the remainder invested in debt instruments. A defining feature of the equity portfolio is its strict adherence to the fund’s mandate. Stocks that graduate to the large-cap universe are exited, ensuring the portfolio remains focused on the mid- and small-cap segments.

The fund increased its mid-cap exposure from 40 per cent to 46 per cent (as of May 2026) of the total assets over the past year, as the fund manager found valuations in the segment more attractive.

On an average, the fund has allocated about 45 per cent to mid-caps and 31 per cent to small-caps over the last five years. It applies strict quality filters in small-cap selection, avoiding companies with a market capitalisation below ₹1,000 crore and favouring businesses with sound fundamentals. To manage liquidity risk, it ensures that 80 per cent of the portfolio can be liquidated within six working days and limits exposure to individual small-cap stocks to 3 per cent.

Equity philosophy

The fund follows a change-driven investment approach, seeking businesses benefiting from company-specific, industry, policy or economic developments. Before investing, it evaluates the sustainability of the change and conducts rigorous checks on management quality, corporate governance standards and business fundamentals.

Key parameters in stock selection include return on equity, cash-flow strength, business sustainability and competitive advantages. Over the past two years, the portfolio has been tilted towards domestic themes, in line with government-led capital expenditure. It is overweight on capital goods, metals, power and healthcare, while maintaining a neutral stance on banks. The fund is underweight on IT and oil & gas, reflecting concerns over global uncertainties.

As of the latest portfolio disclosure, the top three sectors were pharmaceuticals (10.4 per cent), electrical equipment (6.7 per cent) and ferrous metals (5.7 per cent). Over the past year, the fund increased allocations to pharmaceuticals, electrical equipment and insurance by 3-5 percentage points, while completely exiting IT and trimming exposure to ferrous metals and capital markets.

Debt strategy

The fund’s debt portfolio is managed with a clear focus on risk control. Overseen by Alok Singh, who manages both the equity and debt components, the fund predominantly invests in short-maturity, high-credit-quality instruments, favouring AAA- and AA+-rated securities.

Rather than serving as a return driver, the debt allocation acts as a stabilising buffer, helping contain volatility arising from the mid- and small-cap portfolio. As of May 2026, around 2 per cent of the portfolio was invested in government securities and 13 per cent in AAA-rated papers. Less than 1 per cent was allocated to AA-rated bonds issued by Vedanta, Nuvoco Vistas, Birla Corporation and 360 One Prime.

Performance

The fund has participated well in market upcycles, generating strong gains during rallies such as those seen in 2021 and 2024. However, its higher exposure to mid- and small-cap stocks has also made it more vulnerable during market corrections, leading to underperformance in phases such as the September 2024-March 2025 decline.

Even so, its long-term track record remains impressive. Average five-year rolling returns stand at 23 per cent, comfortably ahead of the category average of 16 per cent. These returns have ranged between 15 per cent and 30 per cent. The fund has also outperformed on three-year rolling returns, delivering a CAGR of 22 per cent compared with the category average of 15 per cent.

The expense ratio of the regular plan is 1.82 per cent, marginally lower than the category average of 1.9 per cent. The direct plan is cheaper at 0.69 per cent, compared with the category average of 0.81 per cent.

The fund’s strategy can generate significant upside during favourable market conditions, but its concentrated exposure to mid- and small-cap stocks makes it unsuitable for conservative investors. For those seeking exposure to the higher-growth segments of the market without taking on the full volatility of a pure mid- or small-cap fund, however, it offers a balanced alternative. Investors may consider investing through a systematic investment plan and maintain an investment horizon of at least five years.

Published on June 13, 2026