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Conservative Hybrid fund, basically a kind of fund that has a big part invested in bonds with a bit of exposure to equities. These funds are very less popular among investors. As per the reports of Value Search, there are all over 36 Conservative Hybrid Funds that manage assets, worth Rs 14,645 crore only as of 30^th April 2021.

The question is what is the matter behind its less popularity among the investors? Do investors do not find it sensible to invest in these funds?

Well, let us have a close look at Conservative Hybrid Funds!!

Mix Strategy That Conservative Hybrid Fund Follow!

As per the SEBI, there is a mandate for conservative hybrid funds, they have to invest around 75 to 90 percent of their assets in bonds and 10 to 25 percent inequities. However, there is no specificity mentioned regarding the quality or the duration of the bonds to be held. Also, it is not mentioned that what kind of market capitalization fund manager has to pick to allocate the equity part. This makes the decision more flexible for the fund manager.

According to research and reports, most of the hybrid funds have their allocation in bond assets like 13.37 percent and 5.47 percent of their portfolios in AA and A-rated bonds, respectively. This strategy followed by the fund managers makes it a much low risky option.

Recently, PPFAS AMC has rolled out a new Parag Parikh Conservative hybrid fund (PCH) from May 9. As per the scheme details, the fund will have a minimum of 75 percent of its assets invested in bonds and up to 10 percent in units of real estate investment trusts and infrastructure investment trusts. The scheme will invest 10 to 25 percent of the portfolio in stocks.

After its announcement, the CIO of PPFAS Mutual Fund, Rajeev Thakkar said that the fund will have its bods assets invested in government securities and AAA-rated PSU and corporate bonds, basically, the fund will work towards avoiding credit risks.

He further said that for the Equity part of the fund, stocks with good dividend yield and cash flow will be considered for building the portfolio.

Investors Look Less Interested!

Conservative schemes are structured in such a manner that they get success in attracting investors who look forward to returns one or two percent more than the pure debt funds. Secondly, taxable dividends, make investors low down their interest in these funds.

As per the research, conservative funds have delivered returns around 6.77 and 7.54 percent over three and five years, respectively, that too on having a bit of equity exposure. While on the other hand, short-duration funds with no exposure to equities have delivered 6.61 and 6.58 percent over the same periods of time.

The third factor that makes conservative funds more low-interested investments is the high expense ratio charge. The expense ratio for regular plans is usually 0.76-2.33 percent.

Who Should Invest? 

The yields from many debt fund categories, at 5 percent over the past year, look unattractive as the expected inflation rate is around 5 percent over this year. So, an investment rooted in debt with a small equity kicker seems attractive.

If the investors have a time frame of three years or more they can consider investing in these funds as the profits earned on the units are treated as long-term capital gains and taxed at 20 percent post indexation. Also, investors looking for a regular income can go investing in this fund as it has exposure to dividend-yielding stocks.

Well, it is also advised, instead of investing in these funds, people look more towards investing in debt and equity funds separately instead of mixing the two!  

Conservative funds are taken as the best option by retired investors, as they are many low-risk funds, offer regular income and other features. However, retirees are advised that instead of investing in conservative hybrid funds, they should go for a mixed portfolio that includes, assured returns schemes and mutual funds offering market-linked returns.

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For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).