Conservative Funds

Hybrid mutual funds offer a blend of different types of investments – mainly bonds and equities – to achieve a balanced approach to investing. They’re designed to capture the potential for growth from equities while mitigating risk with fixed-income securities. 

SEBI has classified hybrid funds into seven categories, catering to investors with different risk-return profiles and investment objectives. For investors who prefer to take lower risks, conservative funds can be a lucrative investment opportunity. This article will explore the meaning, features and advantages of conservative hybrid funds.

What are Conservative Hybrid Mutual Funds?

Conservative hybrid funds adopt a conservative approach to mutual fund investing. Like other hybrid funds, conservative mutual funds invest in both equity and debt but hold a major concentration of debt, due to their safer nature, and have a smaller allocation to equities.  

According to SEBI guidelines, these funds need to majorly invest in debt securities, around 75-90%, and the remaining 10-25% in equities. The small exposure to equities helps these schemes generate better returns than pure debt schemes. Meanwhile, the debt portion focuses on generating regular income and capital preservation. 

Conservative mutual funds primarily invest in high-quality debt securities and large-cap stocks, making them suitable for risk-averse investors, who are geared towards safeguarding capital rather than generating returns. 

Best Conservative Hybrid Mutual Funds

List of the top-performing Conservative Hybrid mutual funds sorted by returns with their AUM and Expense Ratio.

Key Features Of Conservative Hybrid Funds

Here are the key characteristics of conservative funds:

Moderate Growth Potential: While the return potential may not be as high as an equity-oriented fund, the small proportion of equity present still offers some degree of growth and the ability to generate inflation-beating returns.

Suitable For Conservative Investors: Conservative mutual funds are ideal for individuals who have a low-risk appetite, and prefer capital preservation over high returns.

Tenure: The investment horizon for conservative mutual funds should typically be medium to long-term.

How Do Conservative Hybrid Funds Work?

Conservative funds spread their investments across equity and bonds. A major part of the fund is invested in debt instruments such as government securities, corporate bonds, debentures, treasury bills, and fixed-income securities. This helps offer stability. The remaining is invested in low-risk equities, allowing scope of earning higher returns.

The fund managers actively manage these funds to maintain a steady debt-to-equity ratio as per SEBI guidelines.

Benefits of Investing in Conservative Hybrid Funds

There are several benefits of investing in conservative mutual funds:

Minimal Risk: Conservative funds, true to their name, are conservative in nature as they have a higher allocation to debt and lower exposure to equities. This makes them less riskier than pure equity funds or aggressive hybrid funds. Moreover, debt is considered to be a safer investment option than equity.

Better Returns Than FDs, Pure Debt Funds: As against bank FDs or pure debt funds, conservative mutual funds can offer higher returns if you stay invested for a long period. A 10-25% exposure to equities helps in capital appreciation and generating higher returns than debt instruments.  

Diversification Benefits: Diversifying across asset classes is a key strategy to minimise risk. Conservative funds invest in both equity and debt, offering a well-diversified portfolio. Moreover, the fund manager can adjust allocation to these asset classes depending on macroeconomic conditions. This flexibility can help earn higher returns.

Risks Associated with Conservative Hybrid Funds

While conservative funds are mostly low-risk investment options, there are a few unavoidable risks associated with them, such as:

Exposure to Multiple Risks: Conservative mutual funds hold stakes in stocks and debt instruments, exposing them to risks associated with these categories. As against a pure debt fund, conservative hybrid funds carry a higher risk. While debt instruments face risks like credit risk, interest rate risk and inflation risk, stocks are exposed to market risk.  

Lower Returns Than Equity Funds: The conservative nature of these funds may result in lower returns compared to funds with higher stock allocations. During strong bull markets, conservative hybrid funds may lag behind more aggressive equity funds.

Management Risk: The conservative fund’s performance depends on the manager's skill in balancing the bond and equity components. Any poor decision by the fund manager may adversely affect the return and risk levels.

Who Should Invest in Conservative Hybrid Funds?

Here are the investors who can consider investing in conservative mutual funds:

Risk-averse Investors: Conservative hybrid funds are ideal for risk-averse investors aiming to add stability and diversification to their portfolios. It is perfect for individuals who prefer a balanced approach to investing and a steady income stream. 

Novice Investors: Conservative funds can be an ideal starting point for investors new to the market as they can enjoy the benefits of equity investing at a lower risk given the higher debt component in these funds. Once an investor is comfortable with stock market volatility, they can explore other equity-oriented options. 

Investors Close to Retirement: Retirees or investors approaching retirement, who prioritise capital preservation over high returns, can look at conservative funds. A young investor can take risks, whereas, for those looking to retire, the aim is to protect their funds so that they don’t disappear with the market crash.

Investors Seeking Higher Returns than FDs: FDs are popular among investors because they’re safe and offer steady returns. However, their returns often don’t outpace inflation by much. On the other hand, investing a portion of your money in equities can help you achieve better returns that beat inflation. Conservative hybrid funds mix debt and equity, aiming to keep risks low while still offering the potential for higher returns.

How to Choose the Best Conservative Hybrid Fund?

Here are some factors you should consider when choosing Conservative Hybrid Funds:

Investment Objective: The first step is to know your investment objective. Conservative hybrid funds perform best over 3-4 years. If you have a short-term investment goal, they may not be the best option for you. 

Risk Tolerance: Relatively safer, these funds still have a certain degree of risks attached to them. The debt part comes with liquidity risk, interest risk and credit risk. While the equity part comes with market risks. So, you should assess your risk profile before opting for conservative funds.

Expense Ratio: All mutual funds include an expense ratio. This is a fee charged by the fund houses to manage your fund. Consider the expense ratio involved in these funds before investing.

Taxation of Conservative Hybrid Funds

Given a 75-90% allocation to debt instruments, a conservative hybrid fund follows the same tax structure as a debt fund. Here’s how these funds are taxed:

Investments made before April 1, 2023

Capital gains made from selling conservative hybrid mutual funds are taxed depending on the holding period. 

Short-term Capital Gains (STCG) Tax

If you redeem your mutual fund units in less than 24 months, the gains are taxed according to your income tax slab rate.

Long-term Capital Gains (LTCG) Tax

If you redeem your mutual fund units in over 24 months, then gains made from investment are taxed at a rate of 12.5% with no indexation benefit.

Investments made on or after April 1, 2023

The holding period does not play a role for investments in debt funds after April 1, 2023, as they are taxed according to your income tax slab rate. 

How Can You Invest In Conservative Hybrid Funds?

To begin investing in the best conservative hybrid funds, follow these steps:

• Open the INDmoney app and log in with your credentials.
• Navigate to the "Mutual Funds" section within the app.
• Use the filter options to select "Conservative Hybrid Funds" to view the available choices.
• Decide between a lump sum investment or a Systematic Investment Plan (SIP) for regular investments.
• Enter the desired investment amount and confirm the transaction.