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Types of Mutual Funds Explained- Which One Should You Choose
In summary
Conservative mutual funds are designed for investors who want greater exposure to debt than equity, while retaining some potential for capital growth.
- Conservative Hybrid Funds invest 75–90% in debt instruments and 10–25% in equity and equity-related instruments.
- They are market-linked investments and do not guarantee returns or protect your capital.
- Your actual risk depends on the scheme, its portfolio, and its SEBI Riskometer level.
- Debt investments can carry interest rate and credit risks.
- The equity portion can cause the fund value to fluctuate with stock markets.
- The Bajaj Broking website lets you explore mutual fund schemes after completing the required KYC.
The right choice depends on your financial goal, investment horizon, and ability to handle fluctuations. Review the scheme objective, portfolio, costs, and Riskometer before investing.
What are conservative mutual funds?
Conservative mutual funds are open-ended hybrid schemes that invest predominantly in debt instruments. SEBI’s category name for these schemes is “Conservative Hybrid Fund”.
The required asset allocation is:
- Debt instruments: 75%–90% of total assets
- Equity and equity-related instruments: 10%–25% of total assets
This allocation distinguishes conservative hybrid funds from equity-heavy hybrid categories. However, the word “conservative” describes the allocation structure, not a guarantee of capital protection.
The debt portion may include government securities, corporate bonds, certificates of deposit, and money market instruments. The equity portion may include shares selected according to the scheme’s investment objective.
AMFI identifies conservative hybrid funds as debt-oriented hybrid schemes with limited equity exposure.
What are the main characteristics?
Conservative hybrid funds have a specific allocation range, but individual schemes may follow different portfolio strategies.
Their main characteristics include:
- Debt-oriented allocation: At least 75% of the portfolio is allocated to debt instruments under the category mandate.
- Limited equity exposure: Equity and equity-related investments remain between 10% and 25%.
- Open-ended structure: Investors can generally purchase or redeem units on business days, subject to settlement rules, exit loads, and exceptional restrictions.
- Market-linked NAV: The NAV changes according to the market value of the underlying debt and equity investments.
- Professional management: The fund manager makes allocation and security-selection decisions under the scheme’s mandate.
- Portfolio diversification: The scheme may invest across several issuers and securities. Diversification can reduce concentration risk but cannot eliminate investment risk.
Conservative hybrid funds are part of the broader hybrid funds category.
What risks do conservative mutual funds carry?
Conservative hybrid funds carry both debt-market and equity-market risks. Investors should not assume that a higher debt allocation guarantees principal or income.
The key risks include:
| Risk | Where it arises | Possible effect |
|---|---|---|
| Interest-rate risk | Debt securities | Bond prices may fall when market rates rise |
| Credit risk | Corporate and other debt issuers | An issuer may delay or fail to make payments |
| Liquidity risk | Securities with limited buyers | The fund may find it difficult to sell at the expected price |
| Equity risk | Shares and equity-related instruments | Market declines may reduce the scheme’s NAV |
| Concentration risk | Large exposure to limited issuers or sectors | Problems in one holding may have a larger portfolio effect |
| Reinvestment risk | Maturing debt instruments | Proceeds may need to be reinvested at lower rates |
SEBI’s Riskometer helps investors assess the overall scheme risk. Its categories are Low, Low to Moderate, Moderate, Moderately High, High, and Very High. The displayed category can change when the portfolio’s risk changes.
What are the potential benefits?
Conservative hybrid funds may offer certain benefits when their portfolio and risks match your investment goal.
Potential benefits include:
- Combined asset exposure: One scheme provides exposure to both debt and equity.
- Potentially lower volatility: A high debt allocation may result in lower volatility than equity-oriented hybrid or pure equity funds.
- Capital-growth potential: Limited equity exposure may support growth over an appropriate investment period.
- Portfolio management: The fund manager monitors asset allocation, interest-rate conditions, credit quality, and equity holdings.
- Investment flexibility: Open-ended schemes generally allow SIP and lumpsum investments, subject to scheme-specific minimums.
These benefits do not guarantee positive returns, regular income, or protection from capital loss.
Conclusion
Conservative mutual funds are a reliable choice for individuals prioritising the security of wealth over rapid growth. To thoroughly evaluate conservative mutual funds, investors must consider their financial objectives, risk tolerance, and investment timeframe. Seeking advice from a financial expert can provide customised perspectives and direction based on individual circumstances and goals.
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Suitability and fund selection
How does the equity allocation affect the risk of a conservative fund?
Higher equity allocation can increase growth potential and volatility. Even within the permitted 10%–25% range, the fund’s NAV may fluctuate with equity markets.
What type of investor may consider a conservative hybrid fund?
It may suit investors seeking mainly debt exposure with limited equity participation, who can accept market-linked returns and have an appropriate investment horizon.
Can conservative hybrid funds lose money?
Yes. Equity declines, rising interest rates, issuer defaults, or liquidity problems can reduce the fund’s NAV and cause losses.
What should investors check before selecting a conservative hybrid fund?
Check the Riskometer, credit quality, debt duration, equity allocation, expense ratio, exit load, portfolio concentration, and investment objective.
Disclaimer
Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319
BFL does NOT:
(i) provide investment advisory services in any manner or form.
(ii) carry customized/personalized suitability assessment.
(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.
In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.
Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.
Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.
Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.
Disclaimer
Bajaj Finance Limited ("BFL") is an NBFC offering loans, deposits and third-party wealth management products.
The information BFL contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.
Disclaimer
Mutual Fund SIP calculator may provide potential investors an approximate estimate on the maturity amount of the monthly SIP, purely based on mathematical calculation of the projected annual return rate selected by investor. However, such calculation does not factor the actual performance by the Asset Management Company (AMC) and should not be treated as any advice or assurance about the actual return of investment. Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return. Please note that the SIP calculator are for illustrations only and do not represent actual returns which may vary depending on various factors including but not limited to actual performance, expense ratio, taxation, exit load (if any), etc.