Conservative Hybrid Funds: Meaning, Advantages and Taxation

As the name suggests, Conservative Hybrid Funds are a type of hybrid mutual funds that follow a conservative investment strategy. Primarily investing in debt securities, these funds are considered to be the least risky hybrid funds with 75% to 90% of the assets allocated in debt and money market securities.

What are Conservative Hybrid Funds?

Conservative Hybrid Funds make investments in a mix of stocks and bonds where about 75% of the assets are invested in instruments like government securities, debentures, bonds, treasury bills or Fixed deposits in order to generate consistent income. Hybrid Funds are those mutual funds that make investments in both equity and debt. The amount of exposure to a particular asset defines if it is an aggressive hybrid scheme (more exposed to equity) or a conservative hybrid scheme (higher exposure to debt/bond securities). As per the norms of the Securities and Exchange Board of India (SEBI), a conservative fund works under a dynamic ratio of debt and equity investments where 10% to 20% of the portfolio must be employed into equity.

The allocation of resources in the relatively low risk assets is what makes Conservative Hybrid Funds less volatile. It provides higher returns than Fixed Deposits. It is ideal for conservative investors with a time horizon of 2-3 years. Some part of the fund is invested in cash and cash equivalent for the sake of liquidity.

Who should Invest?

• Conservative Hybrid Funds are meant for conservative investors who want to go for secure investments and stability. As these funds invest a major part of the corpus in debt, it has lower market volatility risks
• Investors with a minimum investment horizon of at least 5 years will be able to earn returns from these funds
• Investors looking for an alternative to FDs and pure debt funds should consider investing in these funds. These are safer than genuine equity funds and also provide better returns than absolute debt funds as they allot a certain amount of fund to equities for growth purpose

Advantages of Investing in Conservative Hybrid Funds

• Risk-Return Balance

Conservative Funds promise low risks and increased safety of investments as the exposure to equities and market volatility is limited. Although it is considered to be low risk and low return fund, to keep up the pace of growth and catalyze the growth of the portfolio, a small portion of the fund amount is invested in equities that balance the risks and returns of the fund scheme

• Diversification of Portfolio

Investments in a blend of shares and debt not only provide risk adjusted returns but also grant a diversified portfolio to the investors. Conservative Hybrid Funds are more exposed to debt instruments but its investment mandate includes investing in equities; thus, giving the investor the benefits of both asset classes

• Lower Volatility

As mentioned above, Conservative Hybrid Funds are ideal for conservative investors who prefer to take low risks. This fund plan has lower volatility as unlike equity plans that carry high market risks

• Suitable for First Time Investors

Investing in these funds is suitable for first time investors who do not want to go for high risks but look for stable returns and secured investment

Disadvantages

In spite of all the benefits of the Conservative Hybrid Funds mentioned above, there are few disadvantages associated with it.

• Hybrid Funds invest in different asset classes and each asset class needs special expertise. Therefore, it is important to look out for fund managers if they have expertise in both or experts of different asset classes who have expertise in co-managing the funds
• Also, conservative hybrid funds are low risk funds but not completely risk free. It is also a bit difficult to compare it with a benchmark or special indices but can be compared with its peers in the same category

Things to be considered before investing

Every investment requires a sufficient amount of research and valuation of factors such as risks involved, history of returns accrued, business proficiency of the holdings, etc. Here are some of the things which must be considered by an investor before investing in mutual funds:

1. Financial Goal– Before making any investment decisions, it is very important to evaluate that the fund objective is aligned to your financial goals
2. Fund Performance– Measuring the performance of the fund in both bullish and bearish market situations is a necessity as it helps the investors in selecting a reliable fund. One should always choose a fund which has been performing with consistency
3. Fund House & Management– There are numerous mutual funds regulated by different AMCs (Asset Management Companies). Fund houses & fund managers play a very decisive role in the allocation of assets and the selection of stocks. If the management has enough experience and expertise, the fund will easily sail through promising market conditions and deliver good returns
4. Costs Involved– There are different costs involved in mutual fund investments such as expense ratio, entry load, and exit load. Investors must review these costs before heading up for investments
5. Other Basics from the Portfolio: There are multiple other factors such as the fund NAV (Net Asset Value), AUM (Assets under Management), etc. which are to be considered before investing to ensure the reliability and investor engagement in the fund

Top 10 Conservative Hybrid Funds to invest

How to Invest in Conservative Hybrid Funds

You can invest in conservative hybrid funds through either of the following ways-

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Canceled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification)
• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment

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