If you want to invest in hybrid mutual funds and benefit from the diversification they bring in without increasing your portfolio risk too much, conservative hybrid funds may be the ideal choice for you.
The name itself gives you a fair idea of the level of risk that these funds carry, but before you invest in them, you need to know all the essential details of these investment vehicles. So, let us take a closer look at what these mutual funds are, how they work, how they’re taxed, and who should invest in them.
To understand the meaning of conservative hybrid funds, it is essential to first get to the bottom of what a hybrid fund is. A hybrid fund is any mutual fund that invests in a mix of both debt and equity.
In addition to these two asset classes, hybrid funds may also invest in cash and cash equivalents, money market instruments, and/or gold.
Conservative hybrid funds are a type of hybrid mutual fund. These funds invest a vast majority of their assets in debt and fixed-income instruments. The defining feature of conservative hybrid mutual funds is that around 75% to 90% of the assets are invested in debt securities.
The remaining portion - around 25% to 10% of the portfolio - consists of equity and occasionally, other asset classes.
Conservative hybrid funds work pretty much like all mutual funds. In fact, their manner of working is quite similar to how pure debt funds work. Investments from different investors are pooled together to create a collective corpus for the conservative hybrid fund.
This corpus is then invested in debt and equity investments per the fund's objectives.
The fund is then divided into a certain number of units, and each unit is assigned a net asset value (NAV) based on the net assets of the fund. The formula used for this is as follows.
NAV Per Unit = Net Assets in the Mutual Fund ÷ Total Number of Units
So, if the net assets in the fund amount to Rs. 1 crore, and if there are 10 lakh units in the fund, the fund’s NAV will be Rs. 10.
Thereafter, each investor will be allotted a certain amount of funds based on the amount they have invested. And as the value of the assets in the fund’s portfolio changes, the NAV per unit will also fluctuate. In turn, the value of investments made by each investor will also increase or decrease, leading to profits or losses.
Before you invest in a mutual fund belonging to this category, it is important to understand how the taxation of conservative hybrid funds works. As the portfolio of these mutual funds consists predominantly of debt-oriented assets, they are taxed in a manner that is similar to the taxation of pure debt funds.
The tax rates on the gains from conservative hybrid funds will be as follows, depending on the nature of the profits.
These are the gains you make if you sell your mutual fund holdings within 3 years of investment. STCG is added to your total income and is taxed according to the income tax slab rate applicable to you.
These are the gains you make if you sell your mutual fund holdings after 3 years or more from the date of investment. LTCG on conservative hybrid funds is taxed at 20% percent along with indexation benefits.
This sums up the key details of the taxation of conservative hybrid funds. Keep this in mind before you sell your holdings in a conservative hybrid mutual fund.
Now that you know all about the meaning of conservative hybrid funds, how they work, and how they are taxed, it is time to evaluate if this is the right investment option for you. Typically, conservative hybrid mutual funds are best suited for the following types of investors.
If you are eager to increase the equity exposure in your portfolio but are still apprehensive about the high level of risk that direct equity brings in, these hybrid funds may be a good place to begin. As these funds set off the high risk associated with equity by investing mostly in debt, you can venture into the equity market without exposing your portfolio to too much risk.
If you want to earn higher returns than what fixed deposits and other such schemes offer, conservative hybrid funds are the answer. These funds not only offer the safety of FDs but also give your portfolio some exposure to inflation-beating returns from the equity market.
Lastly, any investor who is fast approaching the age of retirement, but does not want to move their capital to low-risk assets fully, can also choose conservative hybrid funds. The vast debt component allows such investors to preserve their capital, while the minor equity component helps earn above-average returns till the retirement phase sets in.
This sums up all the fundamental details about conservative hybrid funds. You can use these details to create a well-informed investment plan and include these mutual funds in your portfolio. Keep in mind that if you have trouble figuring out the best conservative hybrid fund for you, you can always approach a financial planner or investment advisor for further assistance and expert guidance.
The meaning of a conservative hybrid fund is simple. It is a kind of mutual fund that invests in a mix of debt and equity. However, the portfolio predominantly consists of debt instruments, making these funds relatively low-risk investment options.
Around 75% to 90% of the fund's assets may be invested in debt, while the rest may be used to purchase equity. This mix of assets helps conservative investors benefit from the possibility of earning higher returns without giving up the safety of debt investments.
There are many top conservative hybrid funds in the market. The question of which of them is the best depends entirely on what you are looking for. If you wish to invest for short-term or medium-term life goals, the best conservative hybrid fund for you would be different from the ideal option for someone with a long-term investment horizon.
Similarly, if an investor is prioritizing returns over all else, the list of the best conservative hybrid funds would be very different for them. That said, some of the top mutual funds in this category in India include the following -
Conservative hybrid funds are suitable for investors who wish to start investing in equity without taking on too much risk. These mutual funds help strike the right balance between capital preservation and market-linked returns. By investing predominantly in equity and setting aside the rest of the portfolio for debt, conservative hybrid mutual funds are best suited for you if you want to get the best of both worlds.