What are conservative funds? Is this investment suitable for you?

The mutual fund market is widely popular today, especially among risk-averse investors. Investing through mutual funds not only allows diversification but also gives investors the benefit of professional management. These funds offer a good mix of returns and stability, which makes them appealing to investors.

The mutual fund market is huge and offers multiple options to investors to meet their varied requirements. One such unique option is the conservative mutual fund. In today’s article, we will learn the meaning and features of conservative mutual funds. 

What are conservative funds?

Before understanding what conservative funds mean, let’s learn about hybrid funds.

A hybrid fund is a mutual fund category that invests in stocks and debts to offer high returns backed by stability to investors. It works on the idea of diversification, which is the fundamental risk-mitigating strategy in financial markets. The percentage of allocation in debt and equity varies from one fund to another to meet the different objectives of investors.

A Conservative fund is a type of hybrid fund that also invests in debt and equity. The uniqueness of this fund is its conservative approach. These funds focus more on stability over growth. Hence, they invest a large portion of funds into debt instruments and a small portion into equity investments.

How do conservative hybrid funds work?

Conservative funds, as the name suggests, follow a conservative strategy in investing. The objective of such funds is to preserve capital over providing high returns or capital appreciation to investors. However, they do not neglect the latter completely. A small portion invested in equities benefits investors with high returns and capital appreciation, while the portion invested in debts conserves their money and gives them stable returns. 

Features:

• Fund managers often reserve 75% or more towards debt funds and the rest towards equities. 
• Fund managers look for debt securities with high credit ratings to ensure low chances of default at the time of repayment. 
• The equity investment usually involves large-cap stocks which have a proven history of dividend payments and capital appreciation.
• These funds offer moderate returns and are exposed to less risk.
• Conservative funds are ideal for investors with low-risk appetites.

Real-world example of conservative funds in India

Consider the example of the SBI Conservative Hybrid Fund.

The fund was launched on March 24, 2001, and has an average return of 8.42%. It is an open-ended scheme with below-average risk, indicating that the fund has been working well for risk-averse investors.

With a fund size of ₹9,642.13 crores, the fund allocates about 73% in debt, 23% in equity and the rest in other instruments. With close to 3/4th of the fund going to debt instruments, the conservative approach is seen.

Besides, the risk ratios are another proof of the fund’s conservative strategy. The fund’s standard deviation is 3.15 against the market average of 4.19, and the fund’s beta is 0.44 against the industry average of 0.57, indicating low volatility.

Benefits of conservative funds

• Conservative funds are hybrid funds that include investments in debts and equities. These funds expose investors to both markets and allow them to maintain a diversified investment portfolio.
• Since conservative funds invest majorly in high-quality debt funds, the risk of default is low.
• Conservative funds provide investors with a stable source of income since a large portion of the investment goes into fixed-income instruments.
• Despite earning lesser returns than equity funds, investors reap the benefit of high returns and capital appreciation to a certain degree if their stocks perform well.

Taxation of conservative hybrid funds

Returns from conservative funds are liable for tax under two categories based on the tenure of the investment: Long-term capital gains and short-term capital gains.

• For investments of less than three years, returns are liable for tax as per the investor’s income tax slab rate.
• For investments of more than three years, returns are liable for tax at a rate of 20%, including indexation.

If these investments are made after 31 March 2023, both short-term and long-term gains are taxed according to the investor’s income tax slab.

Bottomline

Conservative funds offer a combination of investments in stocks and fixed-income securities. The objective of such funds is to maintain capital and stability, with high returns taking a back seat.

These funds mostly invest in high-rated securities in both categories to minimise risks to the maximum extent possible. Hence, conservative mutual funds are ideal for risk-averse investors, who want to hold a diverse investment portfolio.

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