While categorized as hybrid funds, conservative allocation funds closely resemble debt funds due to their high investment in fixed-income instruments.
For a detailed understanding of conservative allocation funds, let’s discuss the definition, features, important aspects and FAQs of these funds.
Definition & Meaning Of Conservative Allocation Funds
Conservative allocation funds are hybrid funds that invest 75 to 90% of the total assets in fixed-income instruments (debt) and the remaining in equity (stocks).
These funds are tailored for conservative investors who want the preservation of capital and have a lower risk appetite. Additionally, these funds can also help investors to create an extra source of income.
The features of conservative allocation funds discussed below will help you understand them very well and may help you make a wise investment decision.
1. Portfolio Composition
As discussed above, the portfolio of these funds consists of at least 75% of debt securities and fixed-income instruments. This makes them fall under the category of debt funds.
Therefore, conservative allocation funds have limited growth potential and may generate lower returns compared to equity funds or some other hybrid funds.
2. Low Risk
Due to high investments in debt securities, these funds are considered of lower risk than any other hybrid or equity fund.
However, these funds also carry their own set of risks. We will discuss them later in the article.
Conservative allocation funds are taxed similarly to debt mutual funds as they fall under the category of debt funds.
As per recent changes in taxation rules, debt funds are now taxed as per the applicable income tax slab for both long-term capital gains (LTCGs) and short-term capital gains (STCGs).
Points To Consider
There are various points to consider before investing in conservative allocation funds. Give a read below.
1. Financial Plan
It is very crucial to check whether an investment in these funds helps achieve the desired financial goal or not. If these funds align with your financial plan, you may consider them.
2. Risk Assessment
Even if conservative allocation funds highly invest in fixed-income securities, low-quality securities may increase the risk of these funds. Therefore, it is a good idea to assess the quality of underlying securities and stocks.
It is obvious for these funds to generate lower returns than equity funds and some other hybrid funds but they may generate better returns than pure debt funds. Comparing the returns of different mutual fund schemes can help you choose a better one.
However, it is to be noted that these funds are sensitive to interest rate changes which can negatively impact the performance of the fund.
4. Expense Ratio
The fund manager of a hybrid fund requires additional effort compared to pure equity or pure debt funds. This may result in a higher expense ratio that can eat into your returns. Therefore, you can also compare the expense ratios of different schemes.
Note– This article is written for educational purposes only.
What are short-term & long-term capital gains for hybrid funds?
It depends on the composition of the portfolio. For conservative allocation funds, STCGs are gains on investment held for less than 36 months. LTCGs are gains on investment held for more than 36 months.
Who should invest in conservative allocation funds?
Investors who prioritize the preservation of capital over returns and have a lower risk tolerance may prefer conservative allocation funds.
How to invest in conservative allocation funds?
Investment in mutual funds is only a few steps away. Here are the steps:
A. Register with any reputed online investment platform/mutual fund company
B. Open an account & complete KYC
C. Select A Mutual Fund of your choice
D. Choose the mode of investment i.e. lumpsum or SIP Investment
E. Make the payment
F. Review the performance periodically.