Conservative Hybrid Funds

These are open-ended hybrid mutual funds that majorly invest in debt securities, which comprise about 75% to 90% of the fund. Meanwhile, equity securities take up the remaining 10% to 25%. 

 

The allocation in equity securities increases the potential of returns and helps reduce the effects of inflation. Therefore, while the debt portion ensures consistent generation of income, the equity portion ensures growth of capital.

Mutual funds, including conservative hybrid funds, invest in stocks and other underlying assets to generate returns. In this case, conservative hybrid funds invest in equity and debt funds. 

 

Hence, stocks are typically the underlying assets for equity funds. However, financial instruments such as term deposits, government bonds, and corporate bonds, among others, are the underlying assets for debt funds. 

 

Fund managers rebalance the portfolio regularly to maintain the ideal debt and equity proportion as per the asset allocation strategy.

Here are the advantages you can enjoy when you invest in these funds.

• Higher Returns than FDs

   

These funds deliver higher returns compared to traditional instruments, like fixed deposits, since they include equity instruments in the portfolio. As they allocate most of the funds in debt securities, the investment amount is secure. 

 

However, since the equity portion includes stocks, these investments are exposed to a certain degree of risk. 

• Low Volatility

   

Such funds have lower volatility since their portfolios have a mix of debt funds. Here, the risk is lower than equity funds since they are exposed to market risks. 

 

Since conservative hybrid funds have some exposure to equity funds, they are not risk-free. That being said, such schemes are ideal for conservative investors who have a limited risk appetite. 

• Portfolio Diversification

   

With a significant allotment in debt, these funds help diversify your investment portfolio. This means that most of the capital is invested in safe underlying assets. Hence, this safety net reduces the risk of losing the principal amount. 

 

On the other hand, you could earn higher returns with a small portion of the investment portfolio exposed to equity.

Like every other investment avenue, some limitations are associated with investing in conservative hybrid funds. 

• Lower Returns

   

The returns are lower since conservative hybrid funds largely invest in debt securities. Hence, compared to aggressive funds, which hold more investments in equities, the returns may be lower during a bullish market.

• Not Completely Risk Free

   

These funds are exposed to a certain amount of risk since a part of the investment portfolio contains equity. In addition, the debt component of the investment is subject to credit and interest rate risks, too. 

• Hinges on Fund Managers’ Experience

   

Since these funds invest in debt as well as equity, fund managers need to have adequate expertise in both types of asset classes. This is the only way they can manage the associated risk and allocate funds to reduce it while generating the best returns.

Check out some essential points that you must keep in mind before investing in these funds.

• Returns and Risks

   

As mentioned, the debt portion of the fund comes with liquidity risk, credit risk, and interest rate risk. Meanwhile, the equity component of the fund is associated with market risks. So, assess your risk appetite and investment plans before investing. 

• Associated Costs

   

These funds come with associated costs, like the expense ratio, which is the fee that you need to pay for the management of the mutual fund. Always choose an option having a minimum expense ratio to get maximum returns.

• Taxation

   

The taxation of conservative hybrid funds depends on the investment tenor. Short-term capital gains (STCG) are taxed as per your income tax slab. On the other hand, Long-term Capital Gains (LTCG), i.e. if the investment duration exceeds 3 years, are taxable at 20%, along with indexation benefits.