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Best Conservative hybrid funds are open-ended mutual funds that invest primarily in debt instruments, with some allocation for equity and equity-related instruments. The fund invests a minimum of 75% of the total assets in fixed-income investments. It has a maximum of 25% of the total assets allocated towards stocks.
Conservative hybrid funds invest predominantly in debt securities. The fund may allocate 75%-90% of the total assets towards debt instruments. It distributes the remaining 10%-25% of the total assets in equity and equity-related investments, according to SEBI norms. The conservative hybrid fund invests the bulk of the corpus in fixed income investments in ensuring a stable return for investors. It also invests in equity to generate an extra return for the portfolio.
The table below shows the top-performing conservative hybrid funds based on 3-year and 5-year returns:
You may consider investing in a conservative hybrid fund if you have a low-risk appetite. You may invest in conservative hybrid funds if you have an investment horizon of at least two to three years. You could invest in conservative hybrid funds to achieve your short-term financial goals. Conservative hybrid funds are an ideal investment if you seek a small equity exposure in your portfolio. It may offer a higher return as compared to a pure debt fund. Conservative hybrid funds allocate a significant portion towards debt instruments. It may provide stability to your portfolio. You may invest in conservative hybrid funds if you want regular income along with capital gains through exposure to equity and equity-related instruments. Invest in conservative hybrid funds, if you want a higher return as compared to bank fixed deposits. However, the investment is riskier as compared to bank fixed deposits as it has a small exposure to stocks.
Conservative hybrid funds have a significant allocation for debt instruments. It is taxed in a similar way as debt funds. The short-term capital gains after a holding period of less than three years are taxed as per your income tax bracket. The long-term capital gains after a holding period of three years or more are taxed at 20%, with the benefit of indexation. You could consider the indexation benefit, which increases the purchase price of the conservative hybrid fund, to adjust for inflation. Dividends from conservative hybrid funds are taxed in the hands of the investors. The dividends you earn are added to your taxable income. You have to pay taxes according to your income tax slab. The asset management company (AMC) would deduct TDS at the rate of 7.5% if dividends from conservative hybrid funds, exceed Rs 5,000 in FY 2020-21.
Conservative hybrid funds invest predominantly in debt instruments. However, they may have a small exposure to stocks and are affected by market volatility. The debt portion of the portfolio is impacted by interest rate risk and credit risk. Conservative hybrid funds invest in debt securities of short and long durations. It is affected by fluctuating interest rates as it invests in bonds of different maturity periods. The fund manager may invest in lower-rated debt instruments (lower-rated paper) to generate a higher portfolio return. The risk of default or downgrade is higher on lower-rated debt securities.
The following are a few benefits of investing in conservative hybrid funds: