Conservative Hybrid Funds: Definition, Features and Benefits:Conservative hybrid fund is an investment option that can give inflation-beating returns even with low risk. These funds can be a better option for those investors who want to earn higher returns than bank FDs. But at the same time do not want to take high risk associated with investing in pure equity funds. Conservative hybrid funds work to provide stable returns to such investors.
What is a Conservative Hybrid Fund?
Conservative hybrid funds are such hybrid mutual funds, which invest by dividing investors’ money into both debt and equity. But the share of debt is more in this. According to SEBI definition, 75% to 90% of a conservative hybrid fund should be invested in debt instruments like government bonds, corporate bonds, treasury bills, while 10% to 25% should be invested in equity and equity derivatives. These funds mainly focus on capital safety and low volatility. From taxation point of view, they are kept in the category of debt funds only.
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Advantages of Conservative Hybrid Funds
1. Portfolio Diversification
– This fund provides better diversification to investors’ portfolio due to the combination of equity and debt.
– Due to the equity investment involved, it can give higher returns than pure debt funds.
2. Less risk
Due to the higher proportion of debt instruments, the risk in these is lower than that of pure equity mutual funds, aggressive hybrid funds or balanced hybrid funds. This is why it is considered better for risk-averse investors.
3. Higher income than fixed return instruments
– Conservative hybrid funds can give better returns in the medium to long term compared to options like fixed deposits (FD) and recurring deposits (RD).
Due to investment of up to 25% in equity, these funds can give inflation-beating returns in the long run.
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Disadvantages of Investing in Conservative Hybrid Funds
Apart from the benefits mentioned above, there are some negative factors associated with investing in conservative hybrid funds. Due to greater emphasis on capital protection and stable returns and higher proportion of debt instruments, investment returns in these may be lower than other equity-based funds. Apart from this, the returns of these funds completely depend on the expertise of the fund manager. Even a slight mistake in investment can have a negative impact on returns. Apart from this, it should also be kept in mind that even though the risks in these funds are less, the risks are not completely eliminated. Risk of default, risk of inflation and to some extent interest rates also remain risks. Most conservative hybrid funds are placed in the Moderately High risk category on the Riskometer. A major disadvantage of investing in these funds is that the investments made in them are classified as debt funds under taxation rules. Under the new rules, no matter how long the debt funds are held, their returns are added to taxable income. That means no tax benefit of any kind is available on it.
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Who are conservative hybrid funds right for?
Conservative hybrid funds are a better option for investors who are nearing retirement or looking for stable returns for retirement. Investors who want to avoid the volatility of equity funds but want to earn inflation-beating returns. Apart from this, it can also be a good option for investors who want to diversify their portfolio. Before deciding to invest, investors must assess their goals and risk appetite.
