Everything You Need To Know About Conservative Funds
Mutual funds are financial instruments that pool money from different investors, which are then invested in equity or debt securities based on the fund’s investment strategy. As a result, many hybrid funds exist in the market. Some of them have an aggressive approach, while some of them have a conservative approach.
To find the perfect mutual fund that’s suitable for you, you need to understand your risk tolerance capabilities. If you are someone who doesn’t want to take too much risk, a conservative fund is an ideal mutual fund for you.
Let’s find out more about conservative mutual funds through this blog.
Conservative mutual funds hold a mix of debt and equity securities, aiming for lower risk. These funds allocate their investments into debt securities, constituting around 75-90% of their portfolio and a smaller portion dedicated to equity and related instruments, approximately 10-25%. The fund manager also has to rebalance the portfolio from time to time in order to maintain these proportions,
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The modest exposure to equity helps these funds to earn higher returns than solely debt-focused schemes. Conservative funds invest in high-quality debt securities and large-cap stocks. The primary goal of these funds is to provide regular income and potential capital growth and also an aim to preserve the capital.
They have a lower equity exposure compared to aggressive funds and focus on delivering returns that outpace inflation. Here are some of the common features of these funds:
- Lower risks: The fund managers invest in debt securities, these mutual funds are shielded from market fluctuations. If you aim to gain maximum returns with very low risks, these funds are a suitable choice.
- Moderate returns: While not as lucrative as equity funds or riskier alternatives, conservative funds offer moderate returns.
- Suitable for conservative investors: These funds cater well to investors with a lower risk appetite.
- Tenure: Conservative funds perform well over the moderate to long term.
Who Should Invest in Conservative Hybrid Funds?
According to the 100-age rule of asset allocation, investors can allocate their investments into debt and equity based on their age. For instance, if an investor is 25 years old, they should invest 25% of their portfolio in debt and 75% (which is 100-25) in equity.
However, this is a general rule and should only serve as the first step towards asset allocation. Let’s further explore who should invest in conservative hybrid funds:
- New equity investors: If you’re curious about equity investments but lack risk tolerance, you can opt for a conservative hybrid fund focused on capital preservation and moderate returns.
- Seeking higher returns than FDs: If you aim for returns higher than FDs, conservative hybrid funds are an attractive option. Equity exposure can yield returns that surpass inflation, while debt provides nominal returns.
- Nearing retirement: As retirement approaches, transitioning to conservative strategies becomes crucial, as highlighted by the age-based rule mentioned earlier. Conservative hybrid funds offer a gradual shift from pure equity funds, ensuring capital preservation.
Risks in a Conservative fund
Despite containing a significant portion of debt components in their portfolios, they are not entirely risk-free. Any portfolio that includes even a small equity exposure carries market risk. But conservative hybrid funds usually maintain equity exposure of only 10-25%, the associated risk is considerably reduced. Debt also has its own set of risks, like interest rate risk, credit risk, liquidity risk, and inflation risk.
Before considering investments in these funds, you must understand the specific goals they are designed to achieve. Conservative hybrid funds are best suited for fulfilling short-term and medium-term objectives.
Asset management companies also charge a fee known as the expense ratio to manage the equity savings fund in which you plan to invest. This fee covers administrative and operating expenses like the fund manager’s salary. It’s advisable to select a fund with a relatively lower expense ratio to reduce costs.
Taxation in Conservative funds
Conservative hybrid funds, with 75% to 90% of their assets invested in debt instruments, follow the tax structure of debt funds.
Short-term capital gains arise if investments are sold within three years, and they are taxed as per the individual’s applicable income tax slab.
Long-term capital gains occur when investments are held for more than three years, and they are taxed at a rate of 20%, with indexation benefits.
Conclusion
In conclusion, investing money via mutual funds is becoming easier by the day. All you have to know is which fund you want to invest in. Conservative hybrid funds are a good option if you want minimum exposure to market volatility along with moderate returns. So, study the risks well and invest in a fund that suits you well.
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