Conservative Mutual Funds : Features, Suitability & Advantages

What are Conservative Mutual Funds?

Conservative Mutual Funds are defined as a portfolio of both debt and equity securities, as they invest in both debt and equity with a relatively lower risk. They primarily invest in debt securities which turn around 75-90% of total fund proceeds along with a small portion allocated to equity and equity-based instruments which turn around 10-25%. The small attribute given to equity allows these schemes to earn better returns than investments based on pure debt schemes. Conservative funds usually invest only in high-quality debt securities and large-cap stocks. The main objective of these funds is that they protect the investor from market risk and preserve capital for the investor by giving them proper regular returns as well. Conservative Mutual funds have competitively lower exposure to equities as compared to other aggressive funds and have a clear focus on offering returns that surpass inflation.

Features of Conservative Mutual Funds

1. Mitigation of Risks: Conservative Mutual Funds are considered as secured funds as they mitigate the risk that is potentially present in investing in one asset class.

2. Not-Biased: Conservative Mutual Funds funds are not biased regarding any asset either equity or debt, they invest in the most optimal level which generates better returns for the investors.

3. Constant Income and Growth Rate: Conservative Mutual Funds provide a constant income stream as any financial malfunctioning in equity or debt will not affect other classes of assets, and there will be a continuous growth rate.

4. Diversification: Conservative Mutual Funds give you a mixed character for your portfolio. For example, debt has shown a constant character in the past few years. It gives 5-6% returns, whereas you will see equity has shown a highly volatile character.

5. Volatility: Conservative Mutual Funds funds temper the least portfolio volatility as they adjust the price fluctuations by investing in both equity and debt.

6. Market Conditions: The portfolio of the Conservative Mutual Funds can be changed according to the prevailing market condition.

Who Should Invest in Conservative Mutual Funds?

1. People who wants to Start Investing in Mutual Funds: Conservative Mutual Funds are excellent option for those investors who are beginners in the field of mutual fund investment as conservative funds has lower risk as compared to any other fund scheme. Lower risk will attract the investors and also gives them confidence about the mutual fund market.

2. Investors who have Low Risk Appetite: Conservative Mutual fund is ideal for those investors who look for lower risk in investment scheme. As the majority investment is done in debt which provides lower risk and constant returns to the investors. Equity portion helps the investor to grow there investment with a better pace.

3. Investors who Look for Funds with Lower Expense Ratio: Almost all Conservative mutual funds have lower expense ratio as compared to expense ratio of other funds in mutual fund market. Expense ratio is also seen as a decision maker for investment as lower the expense ratio higher will be the net return to the investor.

4. Investors who Look for Diversified Investment: Conservative mutual funds diversify the investment as they invest a lot in debt, they will also invest in equity thus balancing the risk.

5. Investors with Short-Term Goals: Conservative fund can be ideal investment horizon if the investment horizon is around three years. So for short-term goals, this could be your go-to fund.

Factors to Consider before Investing in Conservative Mutual Funds in India

1. Diversification: Conservative Mutual Funds are managed by fund managers, and every fund will have its own set of parameters and composition of different asset classes. So, the investor needs to study the individual composition that fits his investing parameter.

2. Time Horizon: If an investor has a short time horizon, only then he/she should consider Conservative Mutual funds, as they have proved to be beneficial in the short run, i.e. around a period of three years. If investors have long term goals, and they are looking for a fund, Conservative Mutual funds might not be the right choice for them.

3. Tax Implications: Investors need to ascertain the tax implication of the fund, if he/she is ignorant about the tax implication, they might not get the fruitful return out of it.

4. Risks: Investors should consider his/her risk appetite before investing. Although Conservative Mutual funds are less prone to risks, if the investor wants to minimise the risk, he/she should approach a fund that has even more lower dependence on equity.

5. Expense Ratio: Investors should precisely go through the investment terms and conditions, and should carefully understand the expense ratio, as a fund with a lower expense ratio is always better than a fund with a higher expense ratio.

Advantages of Conservative Mutual Funds

1. Diversification of Capital: As conservative Mutual funds invests capital among both equity and debt, this gives exposure of different asset classes to the investor and balances the portfolio as per the prevailing market condition.

2. Mitigation of Risk: Under conservative Mutual funds, the capital is divided among different asset classes of equity and debt, and equity and debt will performs differently, as per their different characteristics. So, even if one asset class suffers other asset class remains unaffected.

3. Steady Returns: Conservative Mutual funds being diversified in nature has the main advantage of gaining returns even in the volatile market condition. Investors who have low risk-bearing capability, prefer conservative Mutual funds for steady returns.

4. Flexibility: Conservative Mutual funds has a high degree of flexibility associated with them, as at any time an investor can manage his/her holding between selected asset classes if the prevailing market condition is not favourable to his/her portfolio.

5. Expert Opinion: A conservative Mutual funds being managed by an experienced fund manager gives investors the best choice for portfolio. Investors can avail the benefit of investing in both debt and equity by selecting only one fund.

Disadvantages of Conservative Mutual Funds

1. Not Risk-Free: Although conservative funds invest a majority of the assets in debt funds, they are not entirely risk-free. They are subject to default risk and interest rate risk. Default risk or credit risk is the risk of not receiving the principal amount. Interest rate risk is the fluctuation in interest rate causing volatility in the returns. Apart from this, the equity portion is exposed to market risks.

2. Fund Manager’s Expertise: The fund’s performance depends on the asset allocation which the fund manager decides. Hence, the fund’s success depends on the fund manager. The fund manager must have enough expertise to manage both equity and debt investments.

3. Low Returns: These funds give lower returns than pure equity or aggressive funds in a bullish market, as their exposure to equity is low.

4. Taxation on Short-Term Holding: If an investor holds a Conservative Mutual fund for a short-term duration, say 1 year, he/she shall be liable to pay tax as per their applicable income tax slab rates, and no benefit of indexation will be available.

5. No Guarantee of Success: The choice of investment between debt and equity stands different between different fund managers or AMC, so the returns will also differ as per the allocation. The portfolio by nature gives the investor an element of discretionary exposure due to the ability that the fund manager possesses to change the mix of assets in the fund.

Conclusion

Conservative Mutual Funds offer investors an investment option that offers stability, regular income, and a greater potential for capital appreciation and well as it helps to protect the capital. By predominantly investing in debt instruments while maintaining a smaller equity allocation, these funds helps to mitigate risk. Conservative Mutual funds have proved to be a popular option for investors seeking stable returns with limited volatility. Investment in Conservative Hybrid Funds are advised for individuals with low risk appetite and for the beginners who want to experience the mutual fund market.