Conservative Hybrid Funds: Meaning, Benefits, Returns, Things to Consider before Investing

Manish Kothari
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Manish Kothari

What are Conservative Hybrid Funds

Hybrid Funds are those mutual funds which invest in a combination of debt and equity securities. The objective of these funds is to offer a diversified portfolio for investors backed with lower volatility than pure equity funds. Also, these funds are able to offer better returns than pure debt products because of their part allocation being in equity markets as per the investment objective of the scheme.

As per SEBI Classifications, Hybrid funds have been classified into 7 sub-categories, each having different risk-return characteristics & suitability for varied investors.

What are Conservative Hybrid Funds?

Conservative Hybrid Funds are one of the popular funds in the hybrid space because of their objective to generate better returns through participation in equity & stability through a major allocation in debt & money market securities.

According to SEBI mandates, these are open-ended hybrid funds which should invest at least 10-25% of their assets in equity securities and 75-90% of their assets in debt & money market instruments. In debt securities, the allocation could be to Treasury bills, bonds, government securities &, debentures.

As the name suggests, these funds build a conservative portfolio by primarily investing in debt securities & allocating a small portion in equity securities of the companies. Their cautious investment approach allows them to offer stable returns with lower volatility as compared to pure equity funds.

Conservative Hybrid Funds can be a good pick for novice investors as they can offer a moderately low-risk diversified portfolio.

Benefits of Conservative Hybrid Funds

Some of the benefits of investing in conservative hybrid funds are:

  1. Returns

The conservative hybrid funds can offer better potential returns than pure debt funds because of their small allocation in equity securities. These funds participate in equity markets so as to be able to offer capital appreciation to investors along with the fixed income-generating securities. 

2. Diversified Portfolio

These funds offer a diversified portfolio to investors through their allocations in debt as well as equity securities in a single fund. The diversification in the portfolio provides for lower volatility & better risk-adjusted returns in the portfolio.

3. Lower volatility

Volatility is generally lower in these funds as compared to pure equity funds. Since the allocation is higher in debt & money market instruments, the overall risks & volatility in the portfolio is lower. The low volatility characteristic of these funds makes them suitable for conservative investors having a low equity risk appetite.

4. Ideal for novice/conservative investors

The portfolio combination offered in conservative hybrid funds is a good start for new investors where they can understand the impact of equity markets in a portfolio along with the stability offered by debt securities. Later, the investors could look up to allocating a higher portion in equity by investing in different equity funds for the purpose of long term capital appreciation or wealth creation.

Taxation of Conservative Hybrid Funds-

As Conservative hybrid funds primarily invest in debt securities, they have the taxability of debt mutual funds which is as follows:

  • The Short Term Capital Gains (STCGs) which are gains on investments redeemed within 3 years are taxed as per the slab rate of investors.
  • The Long Term Capital Gains (LTCGs) Tax at the rate of 20% after indexation benefits is applicable if the mutual fund units are redeemed after 3 years.

This taxation is only applicable in case the investors sell their MF holdings. Otherwise, no tax is applicable for holding the funds.

Things to consider before investing in conservative hybrid funds

  • Investment horizon

Conservative Hybrid Funds are generally ideal for investors with an investment horizon of at least 2-3 years or more. The returns can be volatile over the short run as there is some allocation in equities too. So, it is important to consider your investment horizon & see if it aligns with your financial requirements.

  • Risk Appetite

These funds are suitable for investors with a low to moderate risk appetite. Investors must note that they can experience some volatility in the portfolio even if the fund has a high-quality debt portfolio because of the equity investments. If you can stomach that kind of volatility in the short run, then you could consider investments in this fund. Otherwise, it would be better to invest in pure debt funds for a stable income & returns.

  • Past Performance

Past performance doesn't guarantee consistent performance or outperformance in the future. However, it can be one of the various parameters for analyzing the performance of a mutual fund. While selecting the funds, you should look at the past performance of the fund, its peers & category.

  • Portfolio

It is very important to look at the portfolio of a fund before you make an investment decision. The portfolio of a fund can be a good indicator for predicting the expected performance of a fund in the future. Investors should always consider funds having a quality portfolio so that overall risks are minimized & there is lesser volatility in returns. 

  • Fund Manager

Looking at the performance of various schemes managed by a particular fund manager or fund house can tell about the efficiency & quality of the fund management which they are offering to their investors. As the managers who have delivered consistent & good performance in the past are expected to deliver good returns in the future.

Who should invest in conservative hybrid funds?

Investments in conservative hybrid funds are suitable for conservative investors who do not want a large equity allocation. The major allocation to debt securities & a smaller portion in equity securities makes these funds suitable for investors having a low to moderate risk appetite along with an investment horizon of at least 2-3 years & above. 

Also, Investors looking for products offering better than FD returns for medium to long term investments can benefit from these funds as they can provide potentially better returns in the same time frame coupled with lower volatility than pure equity funds. A small allocation in equity markets could provide for capital appreciation opportunities to investors along with earning stable returns from debt or fixed-income securities.

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