Hybrid funds refer to the investment funds wherein the capital is invested in multiple asset categories to gain a diversified portfolio. Here, an investor can invest in multiple assets through a single fund. Usually, these funds have a combination of equity funds and debt funds. These funds are also referred to as asset allocation funds.
Based on the investor’s risk tolerance, hybrid funds can be classified as conservative for investors with lower risk tolerance or aggressive for investors with higher risk tolerance.
Conservative Mutual Funds
Like other hybrid funds, Conservative Mutual Funds have a combination of equity and debt securities in their portfolio with a lower risk associated with them. The proportion of debt securities is usually between 75% to 90%, whereas equity securities make up about 10% to 25% of the fund. This small proportion of equity securities enhance the returns gained compared to a pure debt fund and also focuses on generating returns that beat inflation. The debt securities portion of the fund ensures consistent income generation, and the equity securities portion of the fund ensures the growth of the portfolio.
The portfolio managers have to constantly rebalance the proportion of the debt to equity securities in the portfolio as per the regulation.
These funds invest primarily in large-cap equity securities and high-quality debt securities, hence, ensuring regular income, capital appreciation, along with capital preservation.
What factors should be considered before investing in Conservative Hybrid Funds?
1. Risk Tolerance and Returns
Conservative hybrid funds allocate around 75% to 90% of the fund to debt funds and 10% to 25% to equity securities. This makes the conservative hybrid funds more prone to risk than a pure debt fund. Credit risk, liquidity risk, and interest rate risk are associated with the debt fund, and market risk is associated with the equities. Also, since conservative funds usually invest in large-cap equities, they are better than the hybrid funds with similar portfolio allocation but which invest in medium or small-cap equities. Hence, an investor needs to analyze the portfolio well before investing in the conservative hybrid fund as the returns will be in proportion to the quality of the debt securities and equities.
2. Investment Plan and Financial Objective
The investment plan has to be framed, keeping in mind the financial objectives of the investors. Conservative hybrid funds are ideal to be invested in for the short-term or medium-term, but they offer better returns when invested for the medium-term, that is, three years to four years investment horizon. Hence, an investor with a financial goal to be met at the end of three or four years, such as buying some asset or educational expense, or even wedding expenses, can be ideally met by investing in these funds.
Usually, a conservative investor prefers to invest in funds with a portfolio of high-quality securities. The equities portion of the fund offers a way to beat inflation. Hence, developing an investment plan aligning with the financial goals of the investor is essential before investing.
3. Expense Ratio
The expense ratio is usually a percentage of the total assets of the fund, charged as a service fee for managing the fund. Hence, a suitable conservative hybrid fund should be chosen to invest in such that the expense ratio is minimum and does not take away a chunk of the returns generated.
Ideal investors of Conservative Hybrid Funds
Conservative hybrid funds, due to their multiple assets investments, allow investors to get a taste of investing in both debt funds and equities.
Investors planning to invest in shares but are opposed to the risk posed by a portfolio consisting entirely of equities can invest in conservative hybrid funds. This would allow them not to jeopardize their entire capital and suffer the loss, if any, on their returns from the fund.
Investors looking for an alternative to banking fixed deposits can opt for these conservative mutual funds. The equity component of these funds helps beat inflation while the fund continues to generate a steady income like the banking fixed deposits. While managing the debt component of the fund, the portfolio managers have to keep the credit and interest rate in control.
Investors nearing retirement are risk-averse and prefer to invest conservatively so that if markets crash, they do not suffer much of the losses. Hence, conservative mutual funds serve as a great option to invest in, as their focus is capital preservation along with growth.
Taxation on Conservative Hybrid Funds
Conservative hybrid funds are composed of 75% to 90% of debt securities and hence come under the purview of similar taxation rules.
If the fund is held for under three years, the fund is taxed under Short-term capital gain tax and are taxed as per the tax slab the fund falls under.
If the fund is held for three years or more, it is taxed under a Long-term capital gain tax at 20%, and the investor enjoys indexation benefits.
Best Conservative Hybrid Funds
Hereunder listed are a few of the best conservative hybrid funds:
|Name of the fund
|Value of the fund (in Lakh) in Rupees
|Canara Robeco Conservative Hybrid Fund
|+12.4 % p.a
|Tata Retirement Savings Conservative Fund
|BNP Paribas Conservative Hybrid Fund
|L&T Conservative Hybrid Fund
|SBI Debt Hybrid Fund
Owing to the risks involved, an investor has to research the funds well and plan their investments accordingly. Also that whether the financial goals of the investor aligns with the potential returns of the conservative hybrid fund. Regular tracking of the fund’s performance and rebalancing the portfolio when needed becomes necessary as the equity securities do not have guaranteed returns.