Conservative hybrid funds have cropped up as one of the most popular low-risk investment options for investors who don’t have a very high-risk tolerance. But at the same time, aggressive investors can also bank on them for larger profits. Conservative hybrid funds offer a unique amalgamation of safety, stability, and growth potential. They achieve this by investing in a combination of debt securities and equities. Let's take a closer look at what conservative hybrid funds are and understand how they can be useful.
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Conservative hybrid funds are a type of conservative mutual fund that brings together the features of both equity and debt funds. They are less volatile as compared to their more aggressive variants. A large proportion of these funds (75%-80%) are invested in debt securities. The smaller portion is funneled into equity and equity-related instruments. Since equity schemes earn better returns than debt schemes, that small investment helps boost the overall returns of the fund. At the same time, the primary focus still remains on preserving capital and generating a steady source of income from debt securities, exposing the investor to minimal equity-related risk factors.
Conservative hybrid funds come with the following benefits:
1. Portfolio Diversification: Having a diverse portfolio is trading 101, and a hybrid fund allows you to do exactly that by investing in multiple asset classes.
2. Preservation Of Capital: The larger portion of the investor’s capital is secured as it is invested into debt instruments.
3. Capital Appreciation: The equity component of the investment leaves room open for profits to increase with the market and with inflation.
4. Management By Professionals: Mutual funds always come with professionals at the helm, helping the investors with their funds and managing them. That benefit is extended to conservative hybrid funds as well.
Apart from the benefits, there are some risks the investor should consider. These factors have been listed below.
1. Low Returns And Market Risk: While the portion of equity share investment is quite minimal, it is still susceptible to market fluctuations. Additionally, these funds generally offer lower returns than equity-based funds.
2. Tax Considerations: Since these funds are held for a long period, the taxation stipulations on them can vary.
3. Defaulting-related Risks: If the issuer of the debt defaults on principal or interest payments, the fund’s returns are negatively affected.
Conservative hybrid funds give investors a balanced foray into investing. They cater to the needs of a diverse class of investors. Diversification across debt and equity allows these funds to provide steady income while preserving capital and allowing the opportunity for capital appreciation.
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