Conservative hybrid funds are a type of open-ended hybrid mutual funds. They majorly invest in debt and fixed income securities. Their returns tend to fluctuate a little in line with the market movements. Since they follow a conservative strategy of investing, both their returns and risk are limited. For the purpose of taxation, they are treated as debt funds. Investors who want to benefit from long term capital gains should stay invested for a period of 36 months.
Conservative hybrid funds are open ended hybrid mutual funds that predominantly invest in debt securities. According to SEBI, their asset allocation to equities should be 10-25% of the total assets. At the same time, the fund should allocate 75-90% of its total assets to debt securities.
This conservative hybrid mutual fund invests 75-90% of its assets in government securities, treasury bills, bonds, or debentures. The rest 10-25% is allocated to equities. While the majority of the fund assets ensure stable returns through investment in fixed income securities, the equity investments help in earning a return from market movements.
Conservative hybrid funds provide higher returns than FDs. However, when the market moves up, they provide marginal extra gains. At the same time, the losses are restricted as well. Hence these funds are considered to be low risk investments.
Since conservative hybrid funds invest the majority of their assets in debt instruments, they are treated as debt funds (hybrid debt funds) for the purpose of tax. Short term capital gains (if the investment is sold before three years or 36 months) are added to individuals’ income and are taxable at their respective income tax slab. Long term capital gains (if the investment is sold after three years) are taxable at 20% with indexation benefit.
Conservative hybrid schemes are a type of hybrid funds. Hybrid schemes invest in both equity and debt securities. However, they differ in terms of equity and debt allocation.
Hybrid funds that invest the majority of their assets in equities are called equity-oriented funds. They are treated as equity funds for the purpose of taxation. On the other hand, hybrid funds that invest the majority of their assets in debt securities are considered as debt oriented funds (hybrid debt funds) and are treated as debt funds for the purpose of taxation.
Conservative funds are mandated to invest 75-90% of its total assets in debt or fixed income securities. The rest 10-25% is allocated to equities. The returns for a conservative hybrid fund are predictable as they majorly invest in fixed income securities. Hence, they are considered low risk investments.
However, they are not completely risk free. A portion of their assets have equity exposure and hence are prone to market risk. Furthermore, the investments in debt securities are prone to credit risk and interest rate risk.
One can invest in hybrid funds through SIP and lump sum route. The minimum investment amount for SIP investment is as low as INR 500. To calculate their SIP return and lumpsum return using mutual fund calculators that are available online.
Conservative hybrid schemes are mandated to invest in both debt and equity. Hence, they offer little diversification. The mix of debt and equity investments not only offers risk adjusted returns but also gives the investor a diversified portfolio. However, the equity exposure is not very high. Therefore, the returns from hybrid funds are comparatively higher than pure debt funds.
Conservative hybrid funds are suitable for investors seeking low risk. These funds have lower volatility as against a pure equity investment. Pure equity funds carry significant market risks. Since debt exposure is dominating in the portfolio, the volatility is low. However, these funds are not completely risk free. The fund has exposure to equity, and the risk associated with them remains.
Conservative hybrid funds have certain risks associated with them. The equity component of the fund is exposed to market risks. On the other hand, the debt investments have default risk (credit risk) and interest rate risk. Default risk or credit risk is a risk that companies can default their payments, resulting in a loss for an investor. Also, interest rate risk is the risk associated with movements in interest rates. In other words, fluctuations in interest rates will have an impact on the returns from debt papers.
A conservative mutual fund invests across different asset classes. Therefore, each asset class requires special expertise. Hence, the fund manager must have expertise across both the asset classes. Or, the fund has different managers who are experts in their field and are collectively managing the fund.
During a bullish phase or a stock market rally the fund’s returns might be lower in comparison to aggressive funds. Aggressive funds are funds with more exposure to equities. Therefore, the returns from conservative funds may be lower.
It is important to align investments with a financial goal. Therefore, it is important to evaluate the fund’s investment objective to understand if it perfectly aligns with one’s financial goal.
Before investing in conservative funds, evaluating the fund‘s historical performance (annualized returns) is important. Though past returns do not guarantee future returns, however, it is essential to study the fund performance. Moreover, many companies have been defaulting in the past, and these have an impact on portfolio returns.
The fund house and the management team plays a vital role in fund selection and asset allocation. Therefore, a strong management team with good expertise and experience is capable of designing a fund that can sustain the market conditions. Also, such funds are capable of delivering promising returns.
Mutual fund investments come with certain costs. These costs are entry load, exit load and expense ratio. Higher expense ratio will ultimately decrease the investment returns. Therefore, before one plans to invest in conservative hybrid funds, they should consider the expense ratio and pick the one with a low expense ratio.
Taxation of conservative hybrid funds is similar to other debt funds. The short term capital gains are taxable as per an individual’s income tax slab rate. On the other hand, the long term capital gains are taxable at 20% with indexation benefit. Also, for investors to benefit from capital gains, they have to stay invested for a minimum of three years.
As the name suggests, conservative hybrid funds are designed for conservative investors. Investors seeking more or less stable returns and secure investments can consider conservative hybrid funds. Also, these funds invest a greater portion of their corpus in debt funds and very less in equity funds.
Conservative hybrid funds are a good alternative to FDs and pure debt funds. Also, these funds are safer than pure equity funds. The returns from conservative hybrid funds are more than a debt fund, as they invest some portion of their corpus in equity for growth purposes.
However, investors should allocate equity & debt themselves and choose the right funds across each asset class.
Following are the types of debt funds
Conservative hybrid mutual funds are hybrid funds that majorly invest in debt instruments. Their returns are a little in line with the market movements. When the market moves up, they give marginal extra gains. On the other hand, when the market goes down, they give marginally low returns.
“It is suggested that investors make their own asset allocation between equity and debt and invest in the funds of each asset class.”
The following are the types of hybrid mutual fund schemes:
1. Conservative Hybrid Fund (debt oriented scheme)
2. Balanced Hybrid Funds or Aggressive Hybrid Fund
3. Dynamic Asset Allocation or Balanced Advantage Fund
4. Multi Asset Allocation Fund
5. Arbitrage Fund
6. Equity Saving Fund
Equity mutual funds invest at least 65% of their assets in equities. To invest in equity funds, one can follow the SIP investment route or lump sum route. The SIP investment route is the most preferred one as it allows investors to invest a little from their monthly income. The minimum investment amount for SIP investment is as low as INR 500. One can calculate their SIP return from investment using a SIP calculator. The categories under equity funds are:
1. Large Cap Fund
2. Mid Cap Funds
3. Large and Mid Cap Funds
4. Small Cap Fund
5. Multi Cap Fund
6. Value Funds
7. Thematic / Sector Funds
8. Equity Linked Savings Scheme (Tax saver funds)
9. Focused Funds
10. Dividend Yield Funds
11. Index funds
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.