Conservative hybrid funds: Types, benefits, and investment strategies

Conservative hybrid funds are mutual funds that invest predominantly in fixed income instruments while also offering some exposure to stocks. Thus, they seek to harness the relative stability of debt securities and access the long-term growth potential of equities. This article tells you more about conservative hybrid funds and what type of investors they may be suitable for.

• Table of contents

• What are conservative hybrid mutual funds?
• How do conservative hybrid funds work?
• Benefits of conservative mutual funds
• Who should invest in conservative hybrid funds?
• Taxation on conservative hybrid funds
• What to consider before investing in conservative hybrid funds

What are conservative hybrid mutual funds?

Conservative funds are hybrid mutual funds that invest across both debt and equity assets. However, they allocate a major portion(75-90%) of their portfolio to fixed income or debt securities including bonds, money market instruments, and cash equivalents. The balance is invested in equities.

By taking limited exposure to equities, conservative hybrid funds aim to capitalise on the upside potential of stocks, while the substantial fixed income allocation lends relative stability and mitigates the downside risk when markets turn volatile. Hence, this makes them more risky than pure equity funds. At the same time, the equity component lends these funds better return potential than traditional savings accounts and fixed deposits.

How do conservative hybrid funds work?

Conservative hybrid funds work by tactically managing the allocation between fixed income and equities within the defined limits, which are as follows:

• Debt instruments: 75% - 90%
• Equity and equity-related instruments: 10%- 25%

The fund manager can adjust the equity-debt allocation within the prescribed limits to generate growth potential and mitigate volatility, depending upon market conditions.

Benefits of conservative mutual funds

Here are some of the advantages offered by this hybrid fund category:

Lower volatility

By primarily investing in fixed income securities, conservative hybrid funds experience lower volatility compared to pure equity funds. This makes them suitable for investors with moderately low risk appetite.

Diversification benefits

Conservative hybrid funds provide exposure to both debt and equity assets resulting in diversification of risk across asset classes, sectors, companies and instruments.

Income and growth potential

The fixed income allocation has the potential to generate steady interest income for investors along with capital appreciation potential from the equity exposure.

Flexible investment options

Conservative hybrid funds can offer lumpsum investment, Systematic Investment Plans (SIPs) and Systematic Withdrawal Plans (SWPs).

Liquidity

As open-ended funds, conservative hybrid funds can provide high liquidity to investors, allowing them to redeem some or all of their units at the prevailing Net Asset Value when needed.

Who should invest in conservative hybrid funds?

• New investors who have a low-risk tolerance and wish to explore the stock market but limit the equity exposure.
• Investors seeking to diversify an equity-heavy portfolio to mitigate risk
• Individuals nearing retirement who seek more conservative avenues to mitigate the impact of volatility on their corpus.

Taxation on conservative hybrid funds

Conservative hybrid funds primarily invest in debt instruments, which means they are classified as debt funds for taxation purposes. Capital gains are added to the investor’s income and taxed as per their prevailing tax slab, regardless of the holding period.

What to consider before investing in conservative hybrid funds

Here are the factors that investors should bear in mind when considering conservative funds:

• Consider if the return potential can meet your requirements.
• Check if you can tolerate some volatility owing to the equity exposure.
• Assess the fund manager's performance in allocating between equities and fixed income.
• Evaluate the fixed income portfolio's credit quality distribution.
• Check the diversification of the equity portion across market caps and sectors.
• Opt for funds with lower expense ratios to optimise return potential.
• Review the exit load structure.

Conclusion

Conservative hybrid funds offer investors a balanced solution to combine the relative stability of debt instruments with the long-term growth potential of equities. Their potential for better returns compared to traditional savings instruments or pure debt funds can make them suitable for new investors as well as retirees looking for relative stability of capital along with some upside potential. They can also be suitable for equity investors seeking to mitigate overall portfolio risk by including a fixed-income component. However, one must assess parameters such as costs, fund manager credentials, portfolio composition, and liquidity before investing.

FAQs:

Is a conservative hybrid fund better than a fixed deposit?

Conservative hybrid funds offer liquidity and can potentially give similar or higher returns than bank fixed deposits in the long run but entail market risk. Fixed deposits provide guaranteed returns and are typically considered safe but are not typically liquid. Investors need to pay a penalty to withdraw funds before maturity and can only make a one-time lumpsum investment.

Is it good to invest in a conservative hybrid fund?

Conservative hybrid funds can be a suitable investment option for novice investors and retirees seeking moderate market-linked growth potential with lower volatility compared to equity-heavy funds.

Are conservative hybrid funds stable?

No mutual fund investment is completely stable. However, the significant exposure to fixed income assets makes conservative hybrid funds relatively stable. However, they do not offer guaranteed returns or capital protection.

Are conservative hybrid funds stable?

Yes, most hybrid conservative funds allow you to invest through lumpsum in addition to conservative hybrid fund SIP.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.