Conservative hybrid funds
These schemes invest in varying proportions in both equity and debt securities
The conservative funds can be the right choice
Hybrid funds come in varied shapes and sizes, and there is a hybrid fund for every type of investor. These schemes invest in varying proportions in both equity and debt securities; therefore, they are suitable for aggressive and conservative investors. These funds offer a great investment opportunity to conservative investors, prioritizing the preservation of capital over returns. In this article, the essential aspects of Conservative Funds are highlighted.
What are Conservative hybrid funds?
Conservative hybrid funds are one type of open-ended hybrid mutual funds that predominantly invest in debt securities. According to SEBI, the fund should allocate 75-90% of its total assets to FD like debt securities such as bonds, government securities, treasury bills, debentures, and the rest 10-25% of the total assets in equities.
The returns are higher than FDs in conservative hybrid funds. The majority of these fund assets ensure stable returns through investment in fixed income securities. However, equity investments help earn a return from market movements when the market moves up, providing marginal extra gains. As the losses are restricted, these funds are considered to be low-risk investments.
How do Conservative hybrid funds work?
Conservative hybrid schemes invest in both equity and debt securities. They are treated according to their terms of equity and debt allocation. When hybrid funds invest most of their assets in equities, they are called equity-oriented funds and treated as equity funds for taxation. On the other hand, most of the assets invested in debt securities are considered debt-oriented hybrid funds and are treated as debt funds for tax.
However, as these funds are mandated to invest 75-90% of its total assets in debt or fixed income securities, the returns are predictable. The remaining 10-25%, allocated to equities, are prone to market risks. Here, exposure to high-quality stocks allows low-risk investors to earn better returns than investing in a pure debt fund.
Who should invest in Conservative hybrid funds?
Conservative hybrid schemes are ideal for those conservative investors with lower risk tolerance and long-term financial goals seeking capital preservation, more or less stable returns and secure investments. People with an investment horizon of a little more than three years can invest in these funds. It is suitable for people who are retired or nearing retirement.
Factors investors must consider before investing in Conservative Mutual Funds
Conservative funds have 10-25% exposure to equity, usually large-cap stocks. They are considered riskier than pure debt but earn better returns than pure debt schemes. These are better than hybrid schemes with a similar asset allocation but with small/mid-cap stocks in their portfolio. The returns are commensurate as per the quality of debt securities and stocks. When the market moves up, they earn extra marginal gains, and when the market goes down, they give marginally low returns.
A majority of the fund invests in fixed income securities and is considered low-risk investments. However, they are not entirely risk-free. A part of their assets have equity exposure, and the investments in debt securities are prone to credit risk and interest rate risk. However, conservative funds usually invest in high-quality debt securities and large-cap stocks, thereby lowering these risks.
Conservative funds charge a small fee for offering fund management services called the expense ratio, like all other mutual funds. It is vital to consider the expense ratio and pick the one with a low expense ratio, which can lower your gains.
Conservative funds are treated as debt funds. Short-term capital gains (STCG) are added to the investor’s taxable income according to the applicable tax slab, and long-term capital gains (LTCG) are taxed at 20% with indexation.
Things to Remember
- Invest according to sync with your Investment Plan.
- The exposure to equities is low as compared to aggressive funds, but this ensures inflation-beating returns.
- Know your priorities very well. In case you want to grow your wealth over the long term, you can increase your exposure to stocks. If your objective is capital preservation and minimal risk, you can look at other investment avenues, even if returns are low.
The conservative funds can be the right choice if you want to outperform inflation with your investments at a low-risk level. Still, as an investor, you need to analyze the portfolio well before investing. If it sounds a little complicated, feel free to talk to your financial advisor to make the right decision.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.