10 Best Conservative Mutual Funds: Meaning, Advantages, and Taxation

Conservative mutual funds are low-risk investments that invest in low-risk securities. They suit investors with low-risk appetite or investors nearing retirement. These funds invest in both equity and debt securities and hence are hybrid in nature. However, their portfolio is more skewed towards low-risk debt instruments. Read to find out more about the best conservative mutual funds.

What are Conservative Hybrid Mutual Funds?

According to SEBI, conservative hybrid mutual funds are open-ended funds that should invest 10-25% of their assets in equities and 75-90% of the assets in debt. On the one hand, they are relatively low-risk investments than pure equity funds. On the other hand, they give better returns than pure debt funds due to their limited exposure to equity. This could be why they are perfect for low-risk investors looking for predictable returns. They are ideal for an investment horizon of three years.

The following are the features of conservative mutual funds:

1. Returns: These funds give better returns than fixed deposits and pure debt funds due to their exposure to equity. Moreover, they give predictable returns making them a good alternative to government securities.
2. Risk: Since these funds invest a majority of the assets in debt securities, they are considered low-risk investments.
3. Asset allocation: These funds invest 75-90% of the assets in low-risk investments like government securities, treasury bills, bonds, and debentures. The rest 10-25% is invested in large-cap stocks, which are well-established entities giving stable returns than mid-cap and small-cap companies.

10 Best Conservative Funds (Based on 3 Year Returns)

Updated - As of March 14, 2023.

How to Select the Best Conservative Hybrid Mutual Funds to invest?

When investing in conservative hybrid funds, you must consider the following factors.

Investment goal and horizon: Before investing, it is important to understand your goals. First, see whether your goal is short-term or long-term. If your goal can be achieved in less than three years, it is a short-term goal; else, it is a long-term goal. Then determine in how many years you want to achieve it. This will help determine your investment horizon. For conservative funds, your ideal investment horizon is around three years. So for short-term goals, this could be your go-to fund.

Fund performance: When selecting a fund for investment, check its performance. You cannot check the performance in isolation. It must be compared to the benchmark and its peers to see how well it is performing. Select funds that perform better than the benchmark and other funds in the category.

Risk-adjusted returns: Besides checking the returns, it is important to check standard deviation, alpha, beta, Sharpe and Sortino ratio. The higher the alpha, Sharpe and Sortino ratio, the better the fund. Standard deviation is a measurement of risk and has to be on the lower side. Compare these ratios with the category average and the benchmark to see where the fund is standing with respect to others.

Costs: Every fund has an expense ratio, which is the cost of managing the fund. The lower the expense ratio, the better, as the costs are deducted from the profits. Apart from this, the exit load is charged if you exit the fund before a specified time. Compare the costs with other funds and select the one with the least expenses.

Fund manager: Fund managers play a crucial role with respect to the fund's performance. They decide the asset allocation of the fund, which impacts the returns. Hence it is best to choose a fund with experienced fund managers having a good track record.

Advantages of Conservative Hybrid Funds

1. Diversification: Conservative hybrid funds invest in equity and debt securities, automatically providing diversification to the portfolio. While the investment in debt is high, giving principal protection, the little exposure to equity ensures better returns than debt funds.
2. Low volatility: These funds predominantly invest in debt securities, hence aren’t exposed much to market volatility. When compared to equity funds, the risk in these funds is significantly low. Hence, they suit investors with low-risk tolerance.
3. Better than FD returns: Since they invest in debt and equity instruments, they give returns that are higher than fixed deposits. The debt portion safeguards the principal, and equity ensures capital appreciation.

Limitations of Conservative Hybrid Funds

1. Not risk-free: Although conservative funds invest a majority of the assets in debt funds, they are not entirely risk-free. They are subject to default risk and interest rate risk. Default risk or credit risk is the risk of not receiving the principal amount. Interest rate risk is the fluctuation in interest rate causing volatility in the returns. Apart from this, the equity portion is exposed to market risks.
2. Fund manager’s expertise: The fund's performance depends on the asset allocation which the fund manager decides. Hence, the fund's success depends on the fund manager. The fund manager must have enough expertise to manage both equity and debt investments.
3. Low returns: These funds give lower returns than pure equity or aggressive funds in a bullish market, as their exposure to equity is low.

How are the best Conservative Hybrid Mutual Funds taxed?

Conservative funds are hybrid in nature, but they predominantly invest in debt securities. Hence for the purpose of taxation, they are treated as pure debt funds. The short-term capital gains are the gains earned if you redeem your investment before a period of three years from the date of investment. They are taxed at the investor's income tax slab rate.

The long-term capital gains are earned after a period of three years from the date of investment and are taxed at 20% with an indexation benefit. Indexation benefit factors inflation when applying taxes to your capital gains. In other words, since inflation reduces the actual returns, the effect of inflation on the returns is considered before applying taxes. Due to the indexation benefit, the overall taxes to be paid comes down.

Who Should Invest in Conservative Hybrid Funds?

As the name suggests, conservative hybrid funds are for low-risk investors looking for inflation-beating returns with capital preservation. These are ideal for such investors as they invest majorly in debt securities.

These funds also suit investors with an investment horizon of three years. The investment in equity is very low; hence, three years is enough time for the debt securities to mature, along with slight capital appreciation from equities.

For investors nearing their long-term goals, conservative funds can be an excellent option as they have low risk and require a minimum investment horizon. Investors can switch from equity to conservative funds to preserve their gains and slowly withdraw them through a systematic withdrawal plan (SWP) to fulfil their financial goals.

How to invest in Conservative Hybrid Mutual Funds?

You can invest in conservative hybrid funds through online and offline modes.

Offline: You can directly approach an investment advisor who will take care of your investments. Alternatively, you can invest on your own by visiting the office of the mutual fund you select. Remember to do your due diligence before selecting a fund for investment.

Online: You can invest online through the asset management company's website or app or invest through a mutual fund platform. Several platforms offer regular and direct plans, and you have to choose the one you are comfortable with and start investing. Jupiter Money is an online platform where you can invest in mutual funds within minutes from the comfort of your home.

Frequently Asked Questions

How long should I stay invested in conservative hybrid mutual funds?

There is no fixed tenure for conservative hybrid funds, but it's best to stay invested for a minimum of three years to reap maximum benefits. If you want to invest for a longer period, select an equity fund to draw the maximum potential of your money.

Where do the best conservative hybrid mutual funds invest?

The best conservative mutual funds invest in debt securities like bonds and debentures and government securities like treasury bills. They also invest in large-cap companies, which are well-established entities having slightly lower risk than mid-cap and small-cap companies.

What kind of returns can I earn from conservative hybrid funds?

On average, you can earn 8-10% returns from conservative hybrid mutual funds. If you want to earn a higher return, then you must take a higher risk and invest in pure equity funds.

Are conservative mutual funds low-risk?

Yes, conservative mutual funds are low-risk investments as they invest in debt securities. Debt securities give fixed, and predictable returns and hence conservative funds are considered low-risk investments.

Are conservative hybrid funds safe?

Conservative funds have low risk but are not entirely safe. They are exposed to default risk, interest rate risk, and market risk. Default risk is the risk of not receiving money from the debtor. Interest rate risk is the effect of interest rate fluctuations on a fund's return. Lastly, market risk is the risk of market volatility on the fund. Since conservative funds invest in equity and debt, they are exposed to these three kinds of risks. However, they are slightly less risky than aggressive and pure equity funds.