Conservative Hybrid Funds

Conservative Hybrid Funds are hybrid mutual funds that invest 75% to 90% of their total assets in debt instruments, and the rest 10% to 25% in equity. It is prefixed with conservative because a majority of its assets are invested in debt securities, which are considered to be highly safe avenues.

All mutual funds have underlying assets in which your money gets invested. The assets fetch you returns. Equity funds have stocks of companies as their underlying asset. A change in the value of these stocks is responsible for your returns. Similarly, debt funds have debt instruments like corporate bonds, term deposits, government bonds, etc as their underlying assets.

A conservative hybrid fund has both equity and debt as their underlying assets. As per regulation, these funds need to have 75% to 90% of their assets invested in debt. The remaining 10% to 25% can be invested in equities. This means that a conservative hybrid fund invests a big chunk of their assets in bonds, debentures, treasury bills, and a small part in the stocks of companies.

The fund managers of conservative hybrid funds have to regularly rebalance the portfolio in order to maintain the proportion of debt and equity as per the regulation

• Higher Returns than FDs:

  Conservative hybrid funds have historically delivered better returns than FDs. One of the reasons for its higher returns is the inclusion of equity in the portfolio. However, in order to earn these higher returns, you'll have to take some risk that comes with investing in stocks.

• Relatively Less Risky than other Hybrid Funds:

  As the name suggests, it is conservative in nature. The portfolio of a conservative fund is designed with the objective of making it an avenue that carries a relatively lower risk in comparison to other hybrid funds. Here, the focus is on ensuring the safety of principal amount, and in the process earning decent returns too. So for keeping the volatility and risk low, more weightage is given to debt instruments.

• Well Diversified Portfolio:

  Diversification plays a key role in any investment strategy. It brings down the risk in the portfolio. Conservative Hybrid Fund has a well-diversified portfolio of both equity and debt. A predominant exposure in debt instruments provides a safety net to your portfolio ensuring stable returns, while a little exposure helps you chase good returns, at least more returns than FD.

• Investors who Want to Start Investing in Equity:

  Investors who want to see what it's like to invest in equities without taking the risk posed by an entire equity portfolio can invest in conservative hybrid funds. They don't want to risk the principal amount in the pursuit of good returns. So investors who want to be exposed to low risks, but can compensate a little on the return side, can invest in Conservative Hybrid Funds.

• Investors Seeking Higher Returns than FDs Without Taking many risks:

  To most Indian FDs are the most convenient options because it's a risk-free instrument that provides consistent returns. However, the returns are decent, but it doesn't beat the inflation by a huge margin. The real returns that you make from FDs barely stand at 1-2% after accounting for inflation. Whereas by having some exposure in equity, you can earn good returns that beat inflation. The debt component of these funds is also managed conservatively, which means fund managers focus on keeping the credit and interest rate in control.

• Investors who are Close to their Retirement:

  It is said the ability to take the most amount of risk is when you are young. The reason being you have time on your side. On the other hand, when you are nearing retirement, you need to move to conservation so that your gains don't disappear if markets crash. So these funds can be a good option to slowly move your retirement corpus from pure equity funds.

• Investment Goals:

  Before investing in these funds you should know what kind of goals of these funds fulfill. They are best for catering to goals that are short term and medium term. However, they tend to give the best results in the medium term. By medium-term goals, we mean, goals that are 3-4 years away, such as a good long vacation abroad with family, buying a car, mobilizing funds for weddings, and more.

• Investment Risks:

  One should know that even though these funds have a high percentage of debt components in the portfolio, they are not entirely risk-free. Any portfolio that has even some amount of equity exposure in it contains market risk. However, since in the case of conservative hybrid funds the equity exposure is only 10-25%, the risk becomes significantly low. Even there are some risks that the debt component carries such as interest rate risk, credit risk, liquidity risk, and inflation risk.

• Expense Ratio:

  You should be cut-clear about the expenses that bite into your returns. In order to manage the equity savings fund you're planning to invest in, the Asset Management Companies charges you a fee called an expense ratio. This is basically the charge to cover the fund's administrative and operating expenses like the fund manager's salary. It is charged on an annual basis. This charge can range anywhere between 0.5%-2%. So, choose a fund that has a relatively lower expense ratio.

• Short-Term Capital Gain Tax (STCG):

  If you sell your investments within 3 years, then it is termed as Short Term Capital Gains. These gains or profits are added to your income and are taxed according to the tax slab you fall in.

• Long Term Capital Gain Tax (LTCG):

  Whereas, any conservative hybrid fund investment held for 3 or more than 3 years, the gains are classified as Long Term Capital Gain (LTCG). Such gains are taxed at the rate of 20% percent along with indexation benefits.

Let's look at some of the top-performing mutual funds helming the Conservative Hybrid Fund category. The performance is based on the basis of returns provided by the fund in the last 3 and 5 years.