Conservative Hybrid Funds: How They Work & How to Invest?
As a mutual fund investor, you can choose from an extensive range of investments with differing levels of potential returns, risk profiles, and time horizons. For example, if you are a risk-averse investor looking for some extra returns, you can choose to invest in conservative hybrid funds.
But what is a Conservative Hybrid Fund?
Conservative funds are open-ended hybrid schemes that invest between 75% to 90% of their corpus in debt instruments and the remaining 10% to 25% in equities.
The debt portion of the scheme includes investments in corporate bonds, government securities, treasury bills, term deposits, etc. While the debt instruments ensure stable returns, the equity portion of the fund helps in earning a return from market movements. This allows conservative investors to earn decent returns while taking slight risk.
How Do Conservative Hybrid Mutual Funds Work?
While equity funds invest primarily in stocks and debt funds invest in debt instruments, hybrid funds invest in both these asset classes. Different hybrid funds use a unique mix of asset classes, depending on the scheme’s objectives.
Conservative funds are relatively less risky than other hybrid funds. Even their returns are quite predictable as they majorly invest in fixed income securities. While the fund managers focus on securities with high credit ratings, they may sometimes invest in low-rated bonds to generate higher returns.
The equity portion of a conservative hybrid fund makes them riskier than pure debt funds but lets them offer slightly higher returns. Furthermore, the investments in debt securities are prone to credit risk and interest rate risk.
Who Should Invest in Conservative Hybrid Mutual Funds?
Conservative funds adhere to the principle of capital preservation and take minimum risks in order to generate profit. As a result, this fund is appropriate for low-risk investors and those who are retired or close to retirement to invest in such funds.
Conservative hybrid funds are a good alternative to FDs and pure debt funds. These funds are also appropriate for investors looking for stable returns and those with long-term financial goals and a low-risk appetite.
What Are the Advantages of Investing in Conservative Hybrid Funds?
- Better Returns than Fixed Deposits- Historically, it has been observed that conservative funds have outperformed FDs in terms of returns. The portfolio’s equity incorporation is one factor contributing to its relatively higher returns. However, investors need to accept some risks while investing in equities in order to receive higher returns.
- Diversified Portfolio- Any successful investment strategy must emphasise diversification. This will reduce the portfolio risks exponentially. While the equity exposure of Conservative Hybrid MFs offers decent returns, or at least returns higher than FD, considerable exposure to debt instruments acts as a safety net for an investors’ portfolio.
- Less Risky- Fund managers of Conservative Funds focus on creating a portfolio that is comparatively less risky investment than other hybrid funds.
Here, the emphasis is on protecting the principal amount while generating reasonable returns. Therefore, debt instruments are given more weight to maintain minimal volatility and risk.
Taxation on Conservative Hybrid Funds?
The IT department taxes these funds in the same manner as debt funds since most of their holdings are in debt.
- Short-Term Capital Gains (STCG)- Investments less than 36 months are subject to STCG tax as per an investor’s income tax slab.
- Long-Term Capital Gains (LTCG)- On the other hand, for investments of more than 36 months, a 20% LTCG tax is applicable after indexation benefits.
Things One Should Consider Prior to Investing in Conservative Hybrid Funds
- Risks- Conservative hybrid mutual funds are riskier than pure debt funds as it invests at least 10% to 25% of their corpus in stocks and other equity-related instruments. This exposed them to market risks. On the other hand, debt investments carry default risk (the risk of companies defaulting on their payments) and interest rate risk (risk associated with movements in interest rates).
- Returns- These funds generate returns depending on the quality of the debt instruments and stocks it has invested in. As an investor, you must thoroughly assess the portfolio of the funds before investing.
- Expense ratio- As an investor, you need to know the costs that reduce your returns. The AMCs charge you a yearly fee which they call an “expense ratio” for managing the mutual fund you intend to invest in. Picking a fund with a relatively low expense ratio will let you get more returns.
- Investment goals- Conservative hybrid mutual funds are best suited for short and mid-term financial goals. Moreover, if you hold these funds for more than three years, you will manage to generate better results and save taxes. These investments are perfect for objectives you must fulfil within 3-4 years, like overseas vacation, purchasing a vehicle, or savings for weddings.
List of 10 Best Performing Conservative Hybrid Funds?
|Name of the Conservation Hybrid Fund||5 Year Annualised Returns|
|Kotak Debt Hybrid Fund – Direct Plan – Growth||9.72%|
|ICICI Prudential Regular Savings Fund – Direct Plan – Growth||8.99%|
|Canara Robeco Conservative Hybrid Fund – Direct Plan – Growth||8.93%|
|SBI Conservative Hybrid Fund – Direct Plan – Growth||8.41%|
|Baroda BNP Paribas Conservative Hybrid Fund – Direct Plan – Growth||7.58%|
|HDFC Hybrid Debt Fund – Direct Plan – Growth||7.65%|
|Axis Regular Saver Fund – Direct Plan – Growth||7.35%|
|UTI Regular Savings Fund – Direct Plan – Growth||7.05%|
|LIC MF Debt Hybrid Fund – Direct Plan – Growth||6.81%|
|Aditya Birla Sun Life Regular Savings Fund- Direct Plan – Growth||6.94%|
How Can You Invest in a Conservative Hybrid Fund via online mode?
Step 1: Visit the official website of your choice of AMC and register yourself.
Step 2: After your account is made, head to the mutual fund scheme section on the website and choose the conservative fund you wish to invest in.
Step 3: Click on the invest option after you have selected the investment method, lump sum or SIP.
Step 4: Enter your KYC details to complete your KYC verification process.
In a conservative hybrid fund, most fund units are invested in debt instruments, which suits investors with a lower risk appetite. Conservative hybrid funds can be an excellent alternative if you’re searching for a reasonably safer route with some equity exposure in your portfolio.
FAQs about Conservative Hybrid Funds
How is a conservative hybrid fund different from aggressive hybrid funds?
An aggressive hybrid fund is an open-ended hybrid fund focusing primarily on investing in equity instruments like stocks. In conservative hybrid funds, the significant corpus is invested in government bonds and other instruments.
Moreover, in aggressive funds, only a small portion of the fund’s total assets is put in debt securities, while the smaller allocation for conservative funds is in equities. Aggressive funds are taxed like equity funds, unlike conservative funds.
How much share of my portfolio should I invest in Conservative Hybrid Funds?
There is no definite answer to this as every investor has different goals, income and risk profile. If you are looking for a relatively safer avenue with a little equity exposure in your portfolio, conservative hybrid funds can be a good option. Also it is always beneficial to contact your financial advisor for the right allocation.
How will investing in a conservative hybrid fund help me?
Investing in a conservative hybrid fund will help you out in the following ways:
1. It can help you allocate two very different asset classes inside a single scheme and diversify your portfolio.
2. You will not have to manage your funds as a fund manager will help you in this task.
What kind of returns can I earn if I invest in conservative hybrid funds?
If you invest in some of the best conservative hybrid funds in the Indian market, you have the potential to earn reasonable returns. However, these returns are based on past performances of these funds. You will likely not face heavy losses if the market goes down due to the high percentage of debt components present in these funds.