Conservative Hybrid Fund – Time to Go Conservative

When it comes to investing in mutual funds, one of the biggest benefits offered to investors is the power of choice. As a mutual fund investor, you have the option of choosing from a wide variety of investments that offer varying levels of potential returns and come with different risk profiles and investment time periods. However, as they say, with great power comes great responsibility. What this essentially means for you is that you need to understand the different mutual fund investment options available in order to make the best investment decisions.

Debt, equity, or both

Now, generally, what you might know is that there are debt mutual funds that are relatively low risk and low return in nature and then there are equity mutual funds  that are relatively higher risk but offer the potential for higher returns. This is commonly known. Then, there is another category of mutual funds that are known as hybrid mutual funds. As the name suggests, these funds are hybrid in nature, i.e., a mix of two or more types of funds. The most common hybrid funds are those that invest in a mix of equity and debt instruments. However, just like all the cards in a pack are not the same, all hybrid funds are also not the same. Within hybrid funds there are several categories depending on what portion of the investment portfolio is allocated to debt instruments and what portion is allocated to equity instruments.

Conservative hybrid funds is one such category under hybrid funds. These funds invest between 75% to 90% of their total assets in debt instruments like bonds, debentures, treasury bills, etc., and the balance 10% to 25% in equity and equity related instruments. Since a majority of the portfolio is invested in debt instruments, these funds are generally categorised as moderately high risk with the potential to generate average returns.

Why invest in conservative hybrid mutual funds

The main benefits of investing in hybrid funds include:

• Potentially higher returns than FDs:Conservative hybrid funds in general invest in fixed-income instruments like government and corporate bonds, treasury bills, debentures, etc. These instruments generally offer slightly better returns than fixed deposits. Since around 75% to 90% of the portfolio comprises these instruments, conservative hybrid funds have the potential to generate returns slightly higher than FDs. Further, the 10% to 25% exposure to equities also has the potential to elevate overall portfolio returns.
• Relatively less risky than other hybrid funds: In most other hybrid funds, the exposure to equities can exceed 25%. Since equities are high risk in nature, the higher allocation to equities makes the other hybrid funds riskier than conservative hybrid funds.
• Diversification benefits:Since these funds invest in a mix of equity and debt instruments, they automatically bring a level of diversification to your investment portfolio. The best thing is that you can get this diversification simply through a single investment rather than through multiple investments.

Taxation of conservative hybrid funds

Another aspect you need to understand before making your investment decision is how these funds are taxed. Since conservative hybrid funds have 75% to 90% of their assets invested in debt instruments, taxation for these funds is aligned with the tax structure of a debt fund. This means that just like debt mutual funds, the capital gains that arise from the sale/redemption of your conservative hybrid fund investment depends on the investment holding period. For this purpose, the holding period and the corresponding tax is divided into short-term and long-term. So, like debt funds,  capital gains made as a result of selling your conservative hybrid funds are taxed according to your investment holding period.

• Short-Term Capital Gain Tax (STCG): If you sell your investments within 3 years of purchasing them then your holding period will be considered as short-term. In such a scenario, the capital gains you make will be taxed according to your tax slab.
• Long Term Capital Gain Tax (LTCG): If you sell your investments any time after 3 years of holding them then your holding period will be termed as long-term. In such a scenario, your gains will be taxed at the rate of 20% percent along with indexation benefits.

Generally, conservative hybrid funds are well-suited for most investor portfolios. Additionally, they can be particularly beneficial if you are a new investor who is looking to cautiously dip his/her toes in equities, someone who is seeking higher returns than FDs but is averse to taking very high risks, or you are close to your retirement.

Clearly, there are multiple things to keep in mind before making an investment decision. Knowing what the particular investment offers is just one of them. Hopefully, this article has helped you better understand conservative hybrid mutual funds  and make more informed investment decisions.

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a onetime KYC process. Investor should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints,  visit-https://www.edelweissmf.com/kyc-norms

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY