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Conservative Hybrid Funds: Definition, Features and Benefits

Name: Conservative Hybrid Funds: Definition, Meaning, Features, Benefits and Tax Rules
Brand: Axis Max Life Insurance
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Conservative hybrid funds are a type of hybrid mutual fund that invests in both debt and equity instruments to provide diversification to an investor’s portfolio. As the name suggests, fund managers invest a ma

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: In Unit Linked Policies, the investment Risk in the investment portfolio is borne by the policyholder.

Written by

Abhishek Chakravarti

BFSI Writer

Abhishek is a financial writer with over 6 years of experience in the BFSI sector. Prior to his current stint with Axis Max Life Insurance, he has worked with leading fintech startups. He specializes in writing about taxation and various investment products like ULIPs, retirement plans, guaranteed investment plans, mutual funds etc.

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Reviewed by

Sahil Rawal

BFSI Expert

Sahil Rawal is a digital & brand management specialist with over 10 years of experience in Financial Services Industry. Life insurance professional with expertise in digital marketing strategy, website content marketing and brand communication designed to increase brand awareness, drive engagement & sales.

What Is Conservative Hybrid Funds Definition & Meaning?

According to Securities and Exchange Board of India regulations, conservative hybrid funds can be defined as a type of mutual fund that invest at least 75% and up to 90% of their total pooled assets in various fixed income debt securities. This means that these funds can keep a maximum of up to 25% and at least 10% of their portfolio invested in equities and equity-derivatives.

This means that in case of conservative hybrid funds, the focus is on minimizing volatility and capital preservation. While, the equity investments ensuring that overall portfolio returns are able to beat returns generated by popular debt-oriented investments like bonds in India, Public Provident Fund, Fixed deposits, etc.

Among the different debt instruments available in the market, conservative hybrid funds invest in such as government securities, high quality corporate bonds, treasury bills (T-Bills), certificate of deposits (CDs), etc. Additionally, equity-based investment is mostly made in stocks of large-cap companies.

It is the duty of fund managers to regularly balance the fund’s portfolio in order to maintain the requisite proportion of debt and equity instruments in line with market movements. Now that you have better understanding of conservative hybrid fund definition and meaning, it is time to shift our attention to other key aspects of these mutual funds like its features, benefits, limitations and taxation rules.

Features of Conservative Hybrid Funds

Some notable features of conservative hybrid funds that investors need to keep in mind are as follows:

As the name suggests, there are the main focus of conservative hybrid funds is to suit the needs of conservative investors who want to minimize their investment risk.
The risk is directly proportional to the returns. As the risk is low, the return potential of these funds is also low and stable. This translated into relatively small upward or downward movement in the Net Asset Value (NAV) of fund units over the short term.
These funds are an ideal investment option for investors who are nearing their retirement and are looking for stable returns and capital preservation in the short to medium term. As a result, conservative hybrid funds can be a suitable addition to those creating a corpus as part of their retirement planning strategy.
As per current mutual fund taxation rules, conservative hybrid funds are treated the same as debt mutual funds. There are two types of taxes which investors pay on profits earned - short-term capital gains tax and long-term capital gains tax.

Benefits of Investing in Conservative Hybrid Funds

The advantages of investing in conservative hybrid funds include the following:

Portfolio Diversification

One of the biggest advantages of investing in conservative hybrid funds is the degree of diversification it offers in comparison to regular equity or debt mutual funds. The mix of equity and debt in its portfolio provides all the advantages of diversification. Moreover, as the equity component is higher than normal debt funds, the returns are also higher that pure debt mutual funds.

Low Risk

Due to the high exposure of conservative hybrid schemes to debt instruments, the potential volatility and risks associated with these funds are much lower than pure equity mutual funds. Therefore, it becomes an ideal investment avenue for risk-averse investors.

Higher Income than Fixed Return Instruments

Conservative Hybrid Funds have the potential to offer a higher rate of return to their investors in the medium to long term, as compared to fixed-return investment options like fixed deposits and recurring deposits. This is due to the fact that these hybrid funds can have up to 25% exposure to equity-oriented instruments. The presence of equity in the fund’s portfolio can lead to higher returns than pure debt-oriented schemes.

Key Limitations of Conservative Hybrid Funds

In order to understand if conservative hybrid funds are suitable option for your investment portfolio, do take into account some key limitations of these mutual funds, such as:

Potentially Low Returns

One of the biggest drawbacks associated with these funds is their low return potential. The main objective of these funds is to provide stable returns and ensure capital preservation. Hence, fund managers mainly invest in high quality debt instruments that typically offer low to moderate yields.

Dependence on Fund Manager’s Expertise

Conservative hybrid funds invest in both equity and debt asset classes over a significant time period. Hence, the skill of the fund manager’s plays a crucial role in determining the performance of the fund. As of yet there are no index funds in India that can be classified as conservative hybrid funds.

Risks

These funds are not completely immune to risks. As the debt instrument exposure is high, there exists some degree of default risk and inflation risk that is partly managed by making high quality debt investments. Apart from this, such funds also suffer from interest rate risk, which involves fluctuations occurring in the market interest rate.

Impact of Inflation

What’s more due to prioritizing high quality fixed return instruments that have low coupon rates and deliver potentially low yields. This can keep the overall returns from these schemes relatively low such that investments is incapable of keeping pace with rising inflation.

Now that we have taken as closer look at the features, benefits and limitations of conservative hybrid funds, let’s move towards taxation treatment of these fund categories.

Taxation Rules of Conservative Hybrid Funds

Since conservative hybrid funds have a majority of their investment in debt instruments, these funds are treated as debt funds for taxation purposes. Gains earned by investors are taxed either under short-term capital gains tax or long-term capital gains tax, depending on the investment time period.

Short-Term Capital Gains Tax

If an investor stays invested in this fund for less than 3 years, all gains earned will come under STCG for taxation purposes. The profits will be taxed as per the investor’s tax slab rate.

Long-Term Capital Gains Tax

If an investor stays invested for 3 years or more, profits earned from this shall come under the long-term capital gains. The tax rate on LTCG is 20%, with indexation benefits. However, this LTCG rule is not applicable to investments in Conservative Hybrid Fund made on or after April 1, 2023. Subsequent to the rule change, the LTCG on debt mutual funds are taxed as per the investor’s tax slab rates, after the gains are added to the taxable income for the applicable fiscal under the head “income from other sources”.

FAQs About Conservative Hybrid Funds

What do conservative hybrid funds mostly invest in?

What type of equity investments do conservative hybrid funds make?

Do conservative hybrid funds allow lump sum investments?

How long should I stay invested in conservative hybrid funds?

What is the minimum amount that needs to be invested in these hybrid schemes?

ARN: Nov23/Bg/10H

Sources:

fi.money/blogposts/conservative-hybrid-funds-things-you-should-know-before-investing

www.etmoney.com/learn/mutual-funds/conservative-hybrid-fund/

www.etmoney.com/mutual-funds/hybrid/conservative-hybrid/71

scripbox.com/mutual-fund/conservative-hybrid

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