The combination of equity and debt in the same scheme can make conservative hybrid schemes a great addition to your investment portfolio. Read this post to understand them in detail.

According to SEBI's Categorization and Rationalization guidelines, hybrid funds are among the five mutual fund classifications. The other four are equity, debt, solution-oriented, and other schemes like ETFs and index funds.

Hybrid funds are further divided into seven sub-categories, with conservative funds being one of them. These schemes invest in a mix of equity and debt securities, making them an ideal addition to investment portfolios. Let's find out conservative hybrid fund meaning, how they work, and more-

What are Conservative Mutual Funds?

Conservative hybrid funds are mutual fund schemes that invest 10%-25% of the portfolio in equity and equity-related instruments. The rest 75%-90% of the portfolio is reserved for debt-based securities.

As most of the investment is made in debt-based instruments, these schemes are potentially less risky than other types of hybrid schemes like balanced hybrid and aggressive hybrid with higher equity exposure.

Also read: What is Hybrid Fund? – Hybrid Mutual Fund Meaning & category

The Working of Conservative Hybrid Funds

As conservative hybrid funds invest in equity and debt instruments, they make it easier for investors to gain exposure to both asset classes through a single investment. These schemes' 10%-25% equity component is invested in stocks and other equity-related instruments.

The debt component, which forms a significant chunk of 75%-90%, is invested in debentures, bonds, and treasury bills. The fund managers of these schemes rebalance the scheme's portfolio at regular intervals to maintain the required equity-debt composition.

Who are Conservative Funds Best Suited For?

You can invest in a conservative fund if-

• You are New to Equity

  Equity as an asset class comes with the highest level of potential risk. Thus, it is advisable to start small. With lower equity exposure, conservative funds can be ideal for investors new to equities.

• Investors Looking for Higher Returns Than Bank FDs

  Bank FDs are preferred by investors for their guaranteed returns. But their below-par post-inflation returns can be a major drawback. The equity and debt combination of conservative funds can help investors generate potentially higher returns than bank FDs.

• Investors Close to Their Retirement Age

  It is generally recommended that investors should reduce their equity exposure as they approach their retirement age. The high debt and low equity composition of conservative mutual funds can be ideal for such investors.

Benefits of Investing in Conservative Hybrid Funds?

Some of the top reasons to invest in conservative hybrid funds are as follows-

• Possibly Less Risky Than Equity Schemes

  Pure equity schemes only invest in equity-based instruments. While these schemes can generate potentially higher returns, they also come with a higher level of risk. In comparison, conservative schemes are significantly less risky.

• Higher Potential Returns Than Debt Funds

  Pure debt funds only invest in debt-based securities. But with conservative hybrid funds, you have an added advantage of small equity exposure. This advantage could help you generate potentially higher returns than pure debt funds.

• Ideal for Medium-Term Investment Horizon

  Looking for an investment you’d like to hold for 2-3 years? You can consider investing in a conservative fund. As these schemes are treated as debt funds for taxation, you can also reduce your tax liability with the indexation benefit by holding the investment for more than 3 years.

What are the Factors You Should Consider Before Investing in Conservative Hybrid Funds?

Before investing, focus on factors like-

• Expense Ratio

  A higher expense ratio leads to lower returns. Therefore, when selecting a conservative scheme, ensure you check the expense ratio of the scheme.

• Scheme Portfolio

  While the risk is on the lower end of the spectrum, these schemes are not risk-free. Check the scheme portfolio to ensure it has high-quality instruments.

• Exit Load

  Many conservative schemes have an exit load. Check the exit load and ensure it aligns with other popular schemes from the category.
  
  Also Read: Exit Load in Mutual Fund: Meaning, Types, and Calculation

How to Invest in Conservative Hybrid Funds?

You can invest in a conservative mutual fund online or offline. For online investment, you can visit the official website of the fund house offering the chosen scheme. You can also visit the nearest office of the fund house to invest offline.

Alternatively, you can also contact a registered mutual fund agent, broker, or distributor to invest offline.

Combination of Safety and Returns with Conservative Hybrid Funds

Understanding what is conservative hybrid fund is critical to make informed investment decisions. While these schemes predominantly invest in debt-based securities to offer a higher level of safety, the small equity exposure helps them generate potentially higher returns.

If you are a risk-averse investor looking for some exposure to the equity segment, a conservative hybrid scheme from a reputed fund house can be an excellent choice.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.