Best Conservative Hybrid Funds
About Conservative Mutual Funds
Balanced or hybrid funds invest in both equity and debt instruments as per a customisable investment goal. They can be conservative or aggressive, depending on how the assets are allocated.
Conservative hybrid funds are suitable for low-risk investors, who prioritise the preservation of capital investment over high returns. The objective is to generate higher returns than the bank’s deposits without undertaking too many risks.
These funds have a capital allocation of 75-90% in high-quality debt instruments and 10-25% in equities (primarily large-cap stocks). A measured exposure to equities helps investors earn higher returns than FDs. This reduces risk of investment but also helps generate inflation-beating returns.
Conservative funds are guided by the principles of capital investment preservation and low-risk capital appreciation. To generate additional growth, these funds also invest in equities that meet criteria like a steady track record or a large market cap company.
How Do Conservative Funds Work?
Conservative funds are essentially funds that fall within the category of balanced or hybrid funds and invest in debt instruments as well as equity. Furthermore, they take into consideration an investor’s investment goal and may work by taking a conservative approach.
In the context of conservative mutual funds, these funds correspond with the investment objectives of investors with low-risk profiles. Such investors may prioritise capital investment preservation above high rewards or returns. The fund works with the aim of generating higher returns than fixed-income instruments offered by banks without too much risk involved.
Conservative funds have an allocation of capital that is 75% to 90% in debt instruments of a high quality. The rest is allocated to equities, usually large-cap stocks. Some measure of exposure to equities aids investors in earning slightly higher returns than regular bank-generated instruments (like FDs). Conservative funds also aim to work at beating the impact of inflation, as well as predominantly working with the premise of low-risk capital appreciation with capital income preservation.
Features of Conservative Mutual Funds
Apart from the fact that conservative funds generate low-risk, inflation-beating returns, they have the following primary features.
- The focus is on the preservation of the principal capital.
- Depending on fund allocation, conservative funds can be ultra-conservative, conservative, or aggressive.
- Fund allocation is typically 80% defensive and 20% growth securities.
- The fund is primarily allocated to debt securities, equities, cash, and cash equivalents to generate low-risk returns.
- Allocating a portion of the corpus of funds into equities like blue-chip companies with a strong track record and large market capitalisation helps earn capital appreciation with comparatively less risk.
- The return may not be very high when investing in conservative funds.
- It’s suitable for low-risk individuals investing for long-term purposes, retirement plans, etc.
- While investing with a short-term goal, these funds are great for saving for travel, a downpayment for a car, paying for weddings, a deposit for a house, etc.
- New investors can learn the art of mutual fund investing by investing in conservative funds.
Advantages of Investing in Conservative Hybrid Mutual Funds
Conservative funds allow investors to protect their initial capital while enjoying decent portfolio growth. The advantages of investing in conservative funds are multifold, including the following –
- They are designed to preserve capital investments while earning inflation-beating returns.
- Because of the low-risk exposure, many investors prefer the conservative approach. This approach offers respite from market volatility.
- Conservative hybrid funds invest in various debt instruments like bonds, cash, and cash equivalent securities.
- These funds generate higher returns than banks’ FDs and debt funds, with a 25% fund allocation in growth equities.
- Ideal for earning low-risk returns suitable for both retirement purposes and short-term financial goals.
- Investors can manage their risk and returns by adjusting the capital allocation within the fund. One can earn more returns by increasing equity exposure in the fund.
Risk Involved in Conservative Funds
- Since conservative funds invest in equities, they are riskier than pure debt funds. While investment in equities increases the returns of these funds, it also exposes them to market volatility. In other words, market risk is one of the risks involved in conservative funds.
- Some of the debt securities in the fund may not be able to outperform inflation. Furthermore, there are the usual risks associated with debt investments such as credit risk (i.e. failure to repay debt on time) and interest rate risk (fall in debt value due to rising interest rates).
- These funds are low-risk and low-return and don’t suit aggressive investors who want capital appreciation.
Factors To Consider Before Investing in Conservative Mutual Funds
When you invest in conservative funds, you would benefit from considering some aspects of funds before you leap into investment:
- Asset allocation: Investing is all about risks and returns, especially if you are an investor who potentially wishes to have a minimum of risk. In terms of conservative funds, as these allocate 75% to 90% of their capital in debt instruments (of low risk), they may pose a reduced degree of risk for more conservative investors. Nonetheless, these funds allocate the rest of their capital to equities, so they may be considered more risky than funds that invest purely in debt instruments. Still, you may consider the fact that these funds offer you more returns than simple hybrid funds as they try to balance risk and reward through their allocation in the best possible way. Before you invest in any conservative fund, it is worthwhile to analyse the fund portfolio to know the exact asset allocation adopted.
- Taxation: The potential returns received from conservative funds are treated just as returns from debt funds would be, depending on the duration of holding. They are taxed accordingly.
- Cost of investing: Think of expense ratios when investing in conservative funds. Since the gains you may make may not be potentially too high as these are low-risk instruments, you may contemplate funds that do not charge high expense ratios that make your gains redundant.
- Investment goals: Notably, the most important thing to consider before investing in a conservative fund is your own investment goal and financial priority. Related to this is your individual risk profile and your readiness to potentially earn lower returns than other hybrid funds.
Who Should Invest in Conservative Mutual Funds?
Like most mutual fund investments, conservative funds are also designed for a target group of investors. These funds earn higher returns than pure debt funds but lower returns than pure equity funds.
Investors wanting regular income, long-term capital appreciation with low risk should invest in conservative funds. The funds work well for individuals saving up for long-term purposes like a child’s education or a retirement fund. Such investors want low-risk investment avenues that give higher returns than fixed deposits.
Depending on one’s investment goals, these funds can act as a standalone investment or as part of a diversified mutual fund investment portfolio.
Taxability of Conservative Funds
Since conservative funds invest more than 65% of the capital in debt instruments, these funds are treated like debt funds.
The investor earns short-term capital gains when the investment period is less than three years. STCG adds to the taxpayer’s personal income and is taxed per the income tax rate. For example, if the investor belongs to the 30% tax bracket, a tax of 30% will apply to short-term capital gains.
Conversely, long-term capital gain rates apply when the investment tenure is over three years. A 20% LTCG rate applies with the benefit of indexation.
Here, if the investor earns dividends on their conservative fund investments, the dividends are included in their taxable income, whichsubject to taxation based on their income tax slab rate. Additionally, if the dividend amount exceeds ₹5,000 in a financial year, a 10% Tax Deducted at Source (TDS) is applied to the excess amount.
How To Invest in Conservative Funds?
Investing in Conservative Funds is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Determine a Conservative Fund that suits your needs and risk profile. You can learn more about each Conservative Fund on the Angel One app. Things to consider at this stage are:
Search for the fund you want to invest in.
Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the Conservative Fund you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
Decide whether you want to invest via SIP or make a one-time investment
Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Conservative Mutual Funds
The following are the top Conservative Hybrid Funds in India:
| Name of the Fund | AUM (₹ Cr) | CAGR 5Y | Expense Ratio | Sharpe Ratio | CAGR 3Y |
| Kotak Debt Hybrid Fund | 3056.98 | 12.41 | 0.45 | 1.23 | 10.95 |
| Bank of India Conservative Hybrid Fund | 65.87 | 12.04 | 1.10 | 0.28 | 13.60 |
| SBI Conservative Hybrid Fund | 9914.72 | 11.18 | 1.05 | 1.31 | 9.70 |
| HDFC Hybrid Debt Fund | 3308.34 | 10.93 | 1.21 | 1.15 | 10.30 |
| UTI Conservative Hybrid Fund | 1641.94 | 10.75 | 1.18 | 1.74 | 9.34 |
The above-mentioned top mid-cap funds are for informational purposes only and are not recommendations. The funds are ranked based on 5-year CAGR as of January 2025.
Kotak Debt Hybrid Fund
The Kotak Debt Hybrid Fund ranks 1st based on its 5-year CAGR of 12.41%. It has an AUM of ₹3,056.98 crore and an expense ratio of 0.45%, which is the lowest among the 5 funds.
The fund’s Sharpe ratio is 1.23, ranking 3rd in the list. Over the past 3 years, it has delivered a CAGR of 10.95%, ranking 2nd in 3-year performance.
Bank of India Conservative Hybrid Fund
The Bank of India Conservative Hybrid Fund ranks 2nd with a 5-year CAGR of 12.04%. It has the lowest AUM among the 5 funds, at ₹65.87 crore, and the 2nd highest expense ratio of 1.10%.
The fund’s Sharpe ratio of 0.28 is the lowest in the list. Over the past 3 years, it has delivered a CAGR of 13.60%, the highest among the 5 funds.
SBI Conservative Hybrid Fund
The SBI Conservative Hybrid Fund ranks 3rd with a 5-year CAGR of 11.18%. It has the highest AUM among the 5 funds, at ₹9,914.72 crore, and an expense ratio of 1.05%.
The fund’s Sharpe ratio of 1.31 is the 2nd highest in the list. Over the past 3 years, it has delivered a CAGR of 9.70%, ranking 4th in 3-year performance.
HDFC Hybrid Debt Fund
The HDFC Hybrid Debt Fund ranks 4th with a 5-year CAGR of 10.93%. It has an AUM of ₹3,308.34 crore and the highest expense ratio in the list at 1.21%.
The fund’s Sharpe ratio of 1.15 ranks 4th. Over the past 3 years, it has delivered a CAGR of 10.30%, ranking 3rd in 3-year performance.
UTI Conservative Hybrid Fund
The UTI Conservative Hybrid Fund ranks 5th with a 5-year CAGR of 10.75%. It has an AUM of ₹1,641.94 crore and an expense ratio of 1.18%.
The fund’s Sharpe ratio of 1.74 is the highest in the list. Over the past 3 years, it has delivered a CAGR of 9.34%, the lowest in the list.
Mutual Funds Calculators
Conservative Hybrid Funds FAQs
Are conservative funds high-risk?
Should I invest in conservative Mutual Funds?
What are the expected returns of conservative funds?
What are the risks involved in investing in conservative funds?
Are conservative funds taxable?
How much money should I invest in conservative funds?
