Conservative Hybrid Funds: Meaning, Advantages And Taxation

Mutual fund investments offer a vast range of investment products across the entire risk spectrum, Equity is considered to be the highest risk asset class but also has the potential of generating substantially higher returns in the long term. On the other hand, debt is the lowest risk asset class that fetches significantly lower returns. A pure equity mutual fund scheme is not suitable for investors looking for stable income along with low volatility. Conversely, a debt fund, may not be able to meet the income expectations of investors who were used to high returns in the past. Enter hybrid mutual funds.

What is hybrid fund?

A hybrid fund is a type of mutual fund that offers a combination of more than one asset class, like equity, debt, cash, etc. These mutual funds are also known as asset allocation fund or balanced mutual funds. In this article, we’ll cover conservative hybrid funds.

What are conservative hybrid funds?

Securities and Exchange Board of India (SEBI) have mandated conservative hybrid funds to invest at least 75 to 90% of their corpus in debt funds and money market instruments. These funds have an asset allocation of equity funds in the range of 10 to 25%.

Advantages of investing in conservative mutual funds

Following are some of the advantages of investing in conservative mutual funds:

  1. Diversification
    Investing in hybrid funds offer diversification of portfolio across asset classes. Since, conservative funds invest in both equity and debt securities, an investor enjoys the benefits of diversification.
  2. Risk-return balance
    Conservative mutual funds promise less volatility along with low risks and an increased sense of safety of investments as the exposure to equity is limited. Further, to keep up with the pace of the growth of the portfolio, the equity component ensures higher returns than pure debt funds.
  3. Less volatility
    Unlike other equity-oriented schemes that carry high-market risks, conservative hybrid funds are endowed with a lower sense of volatility.
  4. Ideal for new investors
    Conservative hybrid funds are ideal for investors who are new to the investing world and have a low-risk profile but also require stable returns on their investments.

Taxation on conservative hybrid funds

For taxation purpose, a conservative hybrid fund is treated similar to debt funds with the following rules:

  1. Long-term Capital Gains (LTCG) are taxed at 20% with the benefit of indexation
  2. Short-term Capital Gains (STGC) are added to the overall taxable income of the investor and taxed according to the taxed slab the investor falls in.

Just like any other mutual funds, invest in hybrid mutual funds after carefully analysing your risk appetite, investment horizon and financial goals. Happy investing!


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