Best Conservative Mutual Funds

Here are some features of conservative mutual funds: 

Asset allocation: As per the Securities and Exchange Board of India (SEBI) regulations, these mutual fund schemes must invest at least 75% to 90% of the fund corpus in debt instruments. The remaining 10% to 25% can be allocated to equity shares. 

Risk-reward ratio: Conservative mutual funds are not associated with high risk, unlike equity funds, as a major portion of the portfolio includes fixed-income generating securities. They carry lower risk in comparison to other hybrid funds. The top conservative mutual funds safeguard the principal amount while providing higher capital appreciation than traditional debt funds.

Short-term Capital Gains Tax: If investors sell their holdings in a fund within 3 years, the profit is known as short-term capital gains (STCG). These gains are added to an investor’s income for the financial year and taxed per the slab rate.  

Long-term Capital Gains Tax: When investors sell their units after 3 years, the gains are termed as long-term capital gains (LTCG). A tax rate of 20% applicable on such gains along with indexation benefits.

The best conservative mutual funds in 2022 are associated with low risk owing to a substantial investment in high-quality debt securities. Hence, these funds may be appropriate for investors seeking decent returns without taking too much risk. They focus on generating inflation-beating returns while ensuring capital preservation, unlike other types of hybrid funds. Nevertheless, when choosing the best conservative mutual fund, investors must consider certain crucial aspects. They are discussed in detail below:

Investment goal: In choosing the right mutual fund scheme, an investor needs to consider his/her financial goal. If the objective of a scheme is not in line with their investment objective, they should consider other options. 

Risk profile: The risk associated with the best conservative mutual funds is comparatively lower than equity-oriented mutual funds. That said, they are not entirely free of risk as the debt instruments carry credit risk, interest rate risk, liquidity risk, etc. Furthermore, any portfolio with equity exposure is impacted by market volatility. Hence, investors must assess their risk profile before allocating their savings to a conservative scheme.  

Expense ratio: For investors, it’s crucial to know about the expenses that might impact their returns. The expense ratio is an annual fee charged by AMCs to cover the administrative and operating expenses incurred for managing the fund’s portfolio. It includes operating and administrative costs, such as the fund manager’s salary. The expense ratio is a small percentage of a fund’s overall assets. The expense ratio varies from one conservative mutual fund scheme to another. Hence, investors must consider this factor when allocating their funds. 

Exit load: Exit load is a penalty charged by an asset management company (AMC) if an investor redeems his/her investments before a pre-specified time. This has a direct impact on the returns earned at the time of redemption. Hence, investors need to know the exit load percentage beforehand. 

Experience of the fund manager: The fund manager takes all the vital decisions concerning a conservative mutual funds’ portfolio. The success of a scheme is dependent upon how well he/she manages the portfolio. Hence, investors must check the scheme’s respective fund manager’s track record before parting with their savings.

Direct or regular plan: When investing in the best conservative mutual funds, investors can subscribe to a direct plan without the involvement of any third party, for example, a distributor. On the contrary, one has to opt for a regular plan via distributors, brokers or other third parties. Direct plans have a lower expense ratio and also reports a lower NAV than regular plans since no brokerage or commission is involved.

Here are some benefits that investor can enjoy by investing in conservative mutual funds:

Higher returns than bank FDs: Conservative hybrid funds are known to provide higher capital appreciation than bank fixed deposits. One of the primary reasons for this is its investment in stocks. 

Less risky than other hybrid funds: The portfolio of this type of mutual fund scheme mainly comprises high-quality debt instruments, making these a less risky option compared to other hybrid funds. The main focus of conservative funds is capital preservation.

Diversification: The portfolio of conservative funds is well-diversified as they allocate their investment corpus to both equity and debt instruments. While a significant investment in debt instruments safeguards the principal amount, equity exposure provides capital appreciation. 

Mode of investment: There are two routes available for investing in the best conservative mutual funds – Systematic Investment Plan (SIP) and lump sum. SIP allows one to invest in a scheme via fixed instalments at regular intervals. Whereas, by opting for the lump sum route, investors can allocate their entire savings to a scheme at once. Please keep in mind that the minimum investment amount in the case of a lump sum is Rs.1,000. For SIP, one must invest at least Rs.500 at regular intervals in most cases.