Conservative Hybrid Funds

The Safe and Secure Conservative Hybrid Funds – For Investors With Low-Risk Tolerance

What Are Conservative Hybrid Funds?

A conservative hybrid fund is for investors seeking safer investments and secure returns. This is an open-ended hybrid mutual fund, a wide range of fixed income investment options, that invests 75-90% of its total assets in debt securities and remaining in stocks.

SEBI has made it easier for investors to pick an investment fund program by giving them a plethora of investment options that meet their financial objectives and risk tolerance.

Past Fund Performance, Fund Management Teams, and Cost Investing affect the returns you generate by investing in Conservative Hybrid mutual funds. The higher the cost ratio (including the exit load, entry load, and expense ratio), the lower the rate of return on investment.

Therefore, before planning an investment in a conservative hybrid fund, you should consider the cost ratio and choose the one with the lower cost ratio.

Who Should Invest in Conservative Hybrid Funds?

As the name implies, conservative investors who look for safe investment and moderate Conservative Hybrid Fund returns can consider this option. These yield better returns as compared to FDs and pure debt funds. Conservative Hybrid Fund returns are more than a debt fund as it invests part of the corpus in equities for growth purposes. These are suitable for:

  1. Investors considering investing in equities
  2. Investors who don’t want to take the risk of the entire equity portfolio
  3. Investors who don't want to risk their principal to get a good return
  4. Investors who want to keep their risk low but can make up for something on the return side
  5. Investors seek higher returns than FDs without taking a lot of risks. If you have equity exposure, you can get a good return even during inflation.
  6. Investors who are about to retire

Features of Conservative Hybrid Funds    

  • Investors can seek investment exposure in both debt and equity funds, depending on their risk tolerance which can be further classified into aggressive, moderate, or conservative risks
  • Conservative hybrid funds offer higher yields than FDs.
  • As the market rises, you can expect a small additional profit and under adverse circumstances, the loss is limited. Therefore, these funds are considered low-risk liability funds (hybrid debt funds) for tax purposes.
  • The debt funds’ investments include term deposits, corporate bonds, and government bonds.

Conservative Hybrid mutual funds are best for aligning your investment with your financial goals.

Taxation

Taxation of the best Conservative Hybrid funds is almost the same as taxation of other debt funds. Short-term capital gains (STCG) are taxed at the individual income tax rate. On the other hand, long-term capital gains (LTCG)  are taxed at 20%, which has the advantage of indexing.

In addition, investors must continue to invest for at least three years to benefit from capital gains. Since Conservative hybrid funds invest 75% to 90% of their assets in fixed income, they follow the fixed-income fund’s tax system. Therefore, as with debt funds, capital gains from the sale of conservative hybrid funds are taxed based on how long the investment is held.

  • The Income Tax Act of 1961 provides tax incentives for the profits from the redemption of investment trusts when investors realize their profits.
  • Profit is classified as STCG with a holding period of shares in such a fund of fewer than 36 months. These profits are added to the investor’s normal income and are taxed at the normal tax rate in effect at that time.
  • In contrast, LTCGs with a holding period of 36 months or more are taxed at 20% (and applicable taxes and surcharges) and can also use the benefits of the index in calculating these benefits.

Risk Involved With Conservative Hybrid Funds     

Conservative hybrid funds carry certain risks. The equity portion is subject to market risk and the Debt certificates, face default risk (credit risk) and interest rate risk. Default risk, or credit risk, is the risk at which a company defaults on payments and causes losses to investors. Interest rate risk is also the risk associated with interest rate fluctuations. In other words, fluctuations in interest rates affect debt yields.

Conservative trusts invest in different asset classes. Therefore, each asset class requires special know-how. Therefore, fund managers need to have expertise in both asset classes. Alternatively, the fund has various managers who are experts in the field and jointly manage the fund.

Low return – During a bull market, fund returns can be low compared to aggressive funds. As a result, conservative funds returns can be below.

Advantage of Conservative Hybrid Mutual Funds  

  1. Such funds provide stable returns to investors, primarily by investing in fixed income. However, given the low risk-reward trade-offs, investors need to remain rational in their expectations of returns.
  2. The main focus of such funds is to maintain the stability of the portfolio. At the same time, partial investment exposure is also allowed on equities so that investors can benefit from the long-term potential of equity investments.
  3. Such funds are suitable for private investors who are unfamiliar with investing because they offer low volatility, stability, and reasonable returns.
  4. Investing in such funds with extended holdings may be subject to indexing profits in the calculation of taxable profits, thereby reducing the effective tax effect and, as a result, after-tax returns.
  5. For portfolio diversification in both debt and capital, you need a conservative hybrid system.
  6. The combination of third-party and equity investments not only provides risk-adjusted returns but also provides investors with a diversified portfolio.
  7. A portfolio of conservative funds is designed to be a less risky route compared to other hybrid funds. The main purpose is to ensure the security of capital and at the same time generate decent profits. Therefore, the focus is on a fixed income to keep volatility and risk low.
  8. Well-diversified portfolio and reduced portfolio risk are some of its key advantages.

Low volatility Conservative hybrid funds are suitable for investors looking for a low level of risk. Compared to pure equity investments, these funds have lower volatility. Pure equity funds are exposed to considerable market risk. Debt exposure that dominates the portfolio reduces volatility. However, these funds are not completely risk-free. The fund is invested in stocks and the associated risks remain.

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