Hybrid funds come in all shapes and sizes – there are schemes for the aggressive as well as conservative investors. Since these schemes invest in both equity and debt securities in varying proportions, it is safe to say that there is a hybrid fund for every type of investor. Many investors with a lower risk tolerance prefer the conservative approach to investments which prioritizes the preservation of capital over returns. While most low-risk investors opt for debt funds, Conservative Mutual Funds offer a great investment opportunity to them. Here, we will explore Conservative Funds and talk about some important aspects of these funds.
What are Conservative Mutual Funds?
Conservative Mutual Funds have a portfolio of debt and equity securities with a relatively lower risk. They primarily invest in debt securities (around 75-90%) with a small portion allocated to equity and equity-related instruments (around 10-25%). The small exposure to equity allows these schemes to earn better returns than pure debt schemes. Further, conservative funds usually invest in high-quality debt securities and large-cap stocks. These funds endeavor to offer regular income as well as capital appreciation while focusing on capital preservation. They have lower exposure to equities as compared to aggressive funds and have a clear focus of offering inflation-beating returns.
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Who should invest in Conservative Funds?
Conservative funds follow the guiding principle of capital preservation and take minimal risks for wealth generation. Hence, it is ideal for low-risk investors and people who are retired or nearing retirement. Since there is an exposure to high-quality stocks, low-risk investors get an opportunity to earn better returns as compared to investing in a pure debt fund. Further, these funds are also ideal for investors seeking regular returns as well as those with long-term financial goals with lower risk tolerance.
Factors to consider before investing in Conservative Mutual Funds in India
Here are some important aspects that you must consider before investing in conservative funds in India:
Risks and Returns
Conservative funds allocate around 75-90% of their total assets to debt securities and money market instruments with a 10-25% exposure to equity (typically large-cap stocks). Hence, they are considered to be riskier than pure debt funds. However, they are better than other hybrid schemes with a similar asset allocation but with small/mid-cap stocks in their portfolio. The returns are commensurate with the quality of debt securities and stocks. As an investor, you need to analyze the portfolio well before investing.
Like all other mutual funds, conservative funds also charge a small fee for offering fund management services called the expense ratio. It is important to choose a scheme with a lower expense ratio as it can otherwise lower your gains.
Invest according to your Investment Plan
Most conservative investors prefer investing in debt funds with a portfolio of high-quality securities. However, to beat inflation, investing in equity is essential. However, as a conservative investor, before plunging into the world of stocks, it is important to create an investment plan in sync with your investment objectives.
For taxation purposes, Conservative funds are treated similar to debt funds with the following tax rules:
- Short-term capital gains (STCG) are added to the taxable income of the investor and taxed according to the applicable tax slab
- Long-term capital gains (LTCG) are taxed at 20% with indexation
Before investing in a conservative mutual fund, ensure that you know your priorities well. If you want to grow your wealth over the long term, then you might want to look for ways to increase your exposure to stocks. However, if your objective is capital preservation and minimal risk and you are ok with lower returns, then you can look at other investment avenues. However, if you want to outperform inflation with your investments with low levels of risk, then conservative funds can be a good choice.