Are you looking for a suitable investment when interest rates are falling? Do you want to go beyond fixed-income investments? You could consider investing in conservative hybrid funds. It is a hybrid mutual fund that invests 75% to 90% of its assets in debt securities. Moreover, you have the remaining 10% to 25% of the assets invested in equity instruments. Should you invest in conservative hybrid funds?
What are conservative hybrid funds?
You have conservative hybrid funds allocating their portfolio towards both equity and debt instruments. For instance, a conservative hybrid fund allocates 75% to 90% of its portfolio towards government bonds, debentures, term deposits, money market instruments and corporate bonds.
You have conservative hybrid funds investing 10% to 25% of their assets in equity and equity-related instruments. You will find the debt portion cushioning the portfolio during adverse market conditions. Moreover, the equity portion has the potential to enhance portfolio returns when stock markets do well.
Should you invest in conservative hybrid funds?
If you are a first-timer in the equity market, you could invest in conservative hybrid funds. It helps as these funds have a higher allocation towards debt securities which protects the portfolio against volatility in the stock market. Moreover, a small allocation towards equity helps novice investors get a taste of the stock market.
You must invest in conservative hybrid funds only if you have three or more years of the investment horizon. It helps to invest in these funds to attain your financial goals only if they match your risk profile.
You may believe that conservative hybrid funds are a risk-free investment. However, these funds have exposure towards equity and may not match your risk tolerance. Moreover, these funds may have exposure towards lower-rated debt securities and are vulnerable to default or credit risk.
If you fall in the higher income tax brackets, you could invest in conservative hybrid funds rather than bank fixed deposits. They are taxed as debt-oriented funds and are tax-efficient as compared to bank FDs. For instance, long term capital gains from debt funds are taxed at 20% with the indexation benefit.
How to pick the right conservative hybrid fund?
You must pick a conservative hybrid fund that has outperformed the benchmark index and peers over some time. Moreover, you must check the portfolio of the fund to determine the credit quality of debt securities. For instance, you must opt for a conservative hybrid fund that invests mainly in AAA-rated debt securities.
You must check the average maturity of the bonds in the portfolio of these funds. For instance, conservative hybrid funds with a higher average duration of bonds in the portfolio are vulnerable to interest rate fluctuations in the economy.
You must check the expense ratio and opt for a conservative hybrid fund with a lower expense ratio. It helps you increase your take-home return over some time. Moreover, do check the equity portfolio of the fund for exposure towards large-cap stocks. For instance, a fund with an equity portfolio tends towards mid-cap and small-cap stocks may be risky.
You may invest in conservative hybrid funds when interest rates are low in the economy. The equity exposure boosts returns, and it is a tax-efficient investment if you fall in the higher income tax brackets. In a nutshell, you must invest in conservative hybrid funds only if you have a longer investment horizon.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
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