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What Are Conservative Mutual Funds & Who Should Invest?

Conservative mutual funds invest primarily in debt securities and allocate a small share of the corpus in equities. This blog lists key features of low-risk conservative funds along with factors to consider before investing in them.
February 11, 2021

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Conservative mutual funds are debt funds that have a conservative approach to investments. Their portfolio is heavily skewed towards debt securities, with a small ratio of the funds invested in high-quality, low-risk equities.

In this blog, we list out key benefits of conservative mutual funds and important factors that investors should consider before choosing a conservative mutual fund.

Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth. Moreover, the conservative mutual funds listed here are not to be confused with the “Conservative” equity funds category on the Cube Wealth app.

What Are Conservative Mutual Funds? 

Conservative mutual funds are balanced funds that offer returns at reduced risk. In these funds, the percentage of debt securities ranges between 75 and 90%. The remaining corpus is invested in low-risk equity securities that allow the fund to earn better returns.

The objective of debt securities is ensuring capital preservation and providing fixed interest income. Market-related instruments on the other hand, help to generate both fixed income and capital gains. Together, these investments are leveraged by the conservative mutual to offer potentially inflation-beating returns to investors.

Who Should Invest In Conservative Funds?

Conservative Mutual Funds strive to generate returns while focusing on capital preservation and minimum risk on investment. They are known to offer better returns than pure traditional investments like FDs and are less-aggressive than credit risk funds.

Therefore, conservative funds are a suitable choice for investors who are looking for one or more of the following benefits:

1. Minimal Risk

Conservative mutual funds do not invest in high-risk instruments and place emphasis on capital preservation, the core of the fund’s underlying investment principle. 

However, other debt funds like liquid funds and even ultra short term funds may offer better returns than conservative mutual funds while being safer than most other mutual funds.

2. Market Exposure

Conservative mutual funds offer exposure to low-risk debt securities as well as market-related instruments. This balanced exposure and returns may help build the confidence of new investors. 

NOTE: You should speak to a Cube Wealth Coach before investing in any mutual fund. It will help you understand which mutual fund will suit your investment goals. 

3. Portfolio Diversification

Conservative funds help balance portfolios that are skewed towards high-risk investments. They are balanced funds that help spread out the risk and diversify portfolio investments.

Watch this video to learn how you can build the perfect portfolio

4. Fixed Income

Conservative mutual funds focus on generating fixed interest income as well as predictable capital appreciation.

Mutual fund jargon too overwhelming? Read this blog to understand every mutual fund related term that you can use to become a better investor. 

5. Predictable Capital Appreciation 

Predictable capital appreciation is one of the key benefits of conservative mutual fund investments. These funds invest in high-quality securities and thus offer assured appreciation on principal investment.

However, every mutual fund is a market linked instrument whose risks you must weigh before investing your hard earned money. Speak to a wealth coach or download the Cube Wealth app to analyse your risk profile.

5 Factors To Consider Before Investing In Conservative Mutual Funds 

#1 Risks and Returns

Conservative funds are riskier than pure debt funds but less risky when compared to equity investments. Similarly, they offer higher returns as compared to fixed deposits but lesser than most mutual funds.

It is important to be sure about expected risks and returns before investing in a conservative mutual fund. If you are not sure how to find a good fund based on these parameters, you can speak to a wealth coach for guidance.

#2 Fund Expertise and Performance

When trusting a mutual fund with their hard-earned money, investors must look at its past performance record. Since the fund invests in different types of securities, the fund manager must have a history of dealing in similar securities.

#3 Expense Ratio & Net Asset Value (NAV)

Expense ratio is an important aspect to consider before investing in a conservative mutual fund. It represents a fund’s expense management. Net asset value refers to the net worth of a fund’s assets minus its liabilities and expenses.

Investors must review a fund’s NAV and expense ratio figures in the recent past to know how dependable it is for investment and how much they stand to pay during redemption.

#4 Taxation 

It is also important to know how gains for conservative mutual funds are taxed.

  1. For investments held for less than 3 years, Short Term Capital Gains Tax (STCG) is applicable on the profit amount. It is added to the taxable income of the investor and taxed according to the applicable tax slab.
  1. For investments held for more than 3 years, Long Term Capital Gains Tax (LTCG) is applicable. The profits are taxed at the rate of 20% along with indexation benefits.

Read this blog to learn more about tax saving mistakes to avoid in 2021

#5 Investment Goals

Each investor has a different risk-appetite, investment goals and returns expectation. For example, conservative funds may carry a lower risk but also offer lower returns than most equity debt funds. This may not be suitable for aggressive investors. 

Conclusion

While there are many advantages of investing in conservative mutual funds, they are not suitable for all kinds of investors. For investors who have a slightly higher risk tolerance, alternatives such as stocks and mutual funds offer much better returns.

Download the Cube Wealth App to know more about curated mutual funds.

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Bhavna Sharma
Bhavna is a Business Economics graduate with over 10 years of writing experience. She writes on a variety of topics for Cube Wealth and helps simplify investment-related concepts with both short & long-form content.

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