When it comes to investing in mutual funds, investors have a wide range of investment options before themselves. There are a variety of mutual fund schemes, from which the investors can choose which ones best suit their risk appetite, financial goals and investment horizon. Investors with a relatively conservative risk profile may consider investing in plain debt funds or hybrid funds inclined predominantly towards debt.

SEBI has set a broad investment mandate for different mutual fund categories making it easier for investors to choose the mutual fund scheme to suit their financial goals and risk appetite.

An investor may aim for investment exposure in both equity and debt funds, but the respective proportion of debt and equity depends on the risk appetite. Risk profiles can be broadly classified as aggressive risk profiles, moderate risk profiles, and conservative risk profiles. An aggressive investor may be comfortable with portfolio volatility while aiming for wealth creation and, thus, opt for a higher equity allocation. On the other hand, a conservative investor may like to stay content with reasonable returns from the investors but prioritise portfolio stability. Such investors may consider investing in conservative hybrid mutual funds.

What is a Conservative Hybrid Fund - Meaning of Conservative Hybrid Mutual Funds

Conservative Hybrid Mutual Funds a specified category of mutual fund schemes amongst the hybrid funds investing predominantly in debt instruments. As per the Securities & Exchange Board of India (SEBI) guidelines, a conservative hybrid fund can invest 75% to 90% of its portfolio in debt securities and the rest in equity securities. With such an investment pattern, conservative hybrid fund returns are also reasonable but coupled with relatively lower investment risk.

Since they invest predominantly in debt, such funds are instrumental in lowering portfolio volatility. Further, with partial equity exposure, investors get equipped with the potential of better returns for their investments. Such funds are suited for investors with an investment horizon of two to three years.

Advantages of Conservative Hybrid Funds

With predominant investment in fixed income debt securities, such funds allow the stability of returns for the investors. However, considering the lower risk-reward trade-off, the investors should stay reasonable with their return expectations. The primary focus of such funds is to maintain portfolio stability.

At the same time, partial investment exposure is also allowed for equities for the investors to gain from the long-term potential of equity investments. Such funds are suitable for retail investors who are new to investing, as these funds allow stability and reasonable returns with lower volatility.

Investors may consider investing in such funds with an investment horizon of 2-3 years. Investments in such funds with an extended holding period may also make them eligible for indexation benefits while calculating the taxable gains, thereby reducing the effective tax impact and, consequently, higher post-tax returns.

How to invest in Conservative Hybrid Funds?

One can similarly invest in conservative hybrid funds as adopted for investing in other mutual fund schemes. As such, the investors can physically submit the application form at any of the official Points of Acceptance for the mutual funds or invest online through the website/ mobile app of the mutual fund house Registrar & Transfer Agent (R&TA).

Taxation of Conservative Hybrid Funds

Income Tax Act 1961 provides tax benefits on the gains from mutual fund investment at redemption when the investors realise the profits. Since conservative hybrid funds need to invest 75% to 90% in debt securities, such funds cannot be classified as equity-oriented mutual funds. The tax rates and availability of indexation benefits depend upon the holding period of investment in such funds.

Since the investment pattern of conservative hybrid funds is predominantly debt, the tax rules for non-equity-oriented funds are applicable for such funds. The gains from conservative hybrid funds are classified as Short-Term Capital Gains (STCG) if the holding period of mutual fund units is less than 36 months and taxed at regular tax rates applicable to the investor.

In case of a more extended holding period, gains are classified as Long-Term Capital Gains (LTCG) and taxed at 20% (plus applicable cess and surcharge) post indexation benefit.

The gains are classified as STCG if the holding period for units in such funds is less than 36 months. Such gains are added to the investor’s regular income and taxed at the regular tax rates as applicable. In contrast, LTCG, with a holding period of 36 months or more, is taxed at 20% (plus applicable cess and surcharge), and the benefit of indexation can also be taken while calculating such gains.

Disclaimer:

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Note: The tax provisions mentioned in the article are for illustrative purposes only and updated as per the Union Budget presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale.