Dear Readers,
As an Investor, you must have come across the term ‘Hybrid Mutual Fund’, which are said to provide returns higher than Debt Funds and slightly lower than Equity funds.
As per the SEBI circular in 2017, Hybrid funds were re-categorized in six different categories, one of them being ‘Conservative Hybrid Fund’.
Well, today at Richvik, we present a small topic on how Conservative Hybrid Funds work and when one should opt for investments in the said fund category.
- What are Conservative Hybrid Funds?
A Hybrid fund is an Investment fund that is characterized by diversification among two or more asset classes. These funds generally invest in a mix of Equity Stocks and Bonds.
A Conservative Hybrid (CH) Fund invests 75 to 90% of their total instruments in Debt instruments such as Government Bonds, Treasury Bills, money market etc, which are considered as highly safe investment instruments.
They are called as Conservative because they predominantly invest in Bonds and Debt Instruments, which are less risky than Equity Hybrid Fund or Equity mutual funds.
- Who should invest in Conservative Hybrid Funds?
Following category of investors can invest in Conservative Hybrid Funds-
- Investors who require regular/ monthly income,
- Investors who have low risk appetite,
- Investors who wish to invest for a short time span, say for 1-2 years,
- Investors who pay high taxes on Bank FD interests,
- Retired Individuals
And so on.
- Are Conservative Hybrid Fund tax efficient?
Tax is levied on gains from Hybrid funds only at the time of sale or Redemption, unlike Bank FDs, where the tax is levied every year on interest earned.
The expected rate of return from CH Fund is 6% to 10%, whereas Banks provide interest rate of 6.25% on FDs. But what we miss is the tax component. An investor who falls in 30% tax bracket, will effectively have 4.37% of returns from FD. (6.25%-(30% of 6.25) = 4.37%)
Thus, CH Funds are considered as highly tax efficient funds.
- Comparison Between CH Fund and Bank FD returns:
Let us look at a comparative chart, taking 9% of Interest from CH Funds and 7% from Bank FD, let us see their performances in a ten year report :
| Returns with Conservative Hybrid Fund and Fixed Deposit returns | ||||||
| PARTICULARS | CH FUND | FD | FD | FD | FD | |
| Return | 9.0% | 7.00% | 7.00% | 7.00% | 7.00% | |
| Personal Tax Rate | Any | 0% | 5% | 20% | 30% | |
| Start With | 1,000,000 | 1,000,000 | 1,000,000 | 1,000,000 | 1,000,000 | |
| Year 1 | 1,090,000 | 1,070,000 | 1,066,500 | 1,056,000 | 1,049,000 | |
| Year 2 | 1,188,100 | 1,144,900 | 1,137,655 | 1,115,920 | 1,101,430 | |
| Year 3 | 1,295,029 | 1,225,043 | 1,213,791 | 1,180,034 | 1,157,530 | |
| Year 4 | 1,411,582 | 1,310,796 | 1,295,256 | 1,248,637 | 1,217,557 | |
| Year 5 | 1,538,624 | 1,402,552 | 1,382,424 | 1,322,041 | 1,281,786 | |
| Year 6 | 1,677,100 | 1,500,730 | 1,475,694 | 1,400,584 | 1,350,511 | |
| Year 7 | 1,828,039 | 1,605,781 | 1,575,492 | 1,484,625 | 1,424,047 | |
| Year 8 | 1,992,563 | 1,718,186 | 1,682,277 | 1,574,549 | 1,502,730 | |
| Year 9 | 2,171,893 | 1,838,459 | 1,796,536 | 1,670,767 | 1,586,921 | |
| Year 10 | 2,367,364 | 1,967,151 | 1,918,794 | 1,773,721 | 1,677,006 | |
| At the time of redemption* | 2,290,666 | 1,967,151 | 1,918,794 | 1,773,721 | 1,677,006 | |
*Note- Hybrid funds are taxed at the time of selling, at 20% of capital gains.
Thus, as an investor with low risk capacity or retired Individuals, instead of choosing Bank FDs, it is better to opt for Debt fund or Conservative Hybrid fund, which will provide tax advantage in the long run. Also, the above working is made keeping Bank FD rate at 6.25%, which may even fall in the consecutive periods.
- Past Performance of Conservative Hybrid Funds:
Now, let us look at top performing funds in the CH fund category:
| Sr. No. | Name | 3 year | 5 year |
| 1 | Aditya Birla Sun Life Regular Savings Fund | 9.56 | 13.18 |
| 2 | ICICI Prudential Advisor Series- Thematic Fund- Regular Plan | 13.06 | 15.08 |
| 3 | UTI Regular Savings Fund- Regular Plan | 9.06 | 11.76 |
| 4 | SBI Magnum Children’s Benefit Fund | 15.36 | 17.55 |
| 5 | Kotak Asset Allocator Fund- Regular Plan | 8.95 | 16.19 |
Thus, we can see that, the average five year returns from top performing Conservative Hybrid Funds over 5 years have been 10-15% per annum.
We can conclude that Conservative Hybrid Funds are very much suitable for Risk Averse investors, and for those who are looking for stable, consistent income which can beat inflation in the long term horizon.
We, at Richvik, provide end to end financial services to our clients and recommend financial plans to them on the basis of their risk appetite, time horizon of investments and need of funds.
In order to know more about Conservative Hybrid funds and invest in them, feel free to contact us.