Conservative Hybrid Mutual Funds – Better returns than traditional debt instruments and less risky than equity

In today’s uncertain financial environment, many investors are searching for options that provide a balance between safety, income, and moderate growth. One such option that has gained popularity is the Conservative Hybrid Mutual Fund. These funds are particularly suitable for individuals who have a low risk appetite, or are looking to park their capital for short- to medium-term goals while still aiming for better returns than fixed deposits.

Conservative Hybrid Funds invest predominantly in fixed income instruments such as government securities, corporate bonds, and money market instruments. A smaller portion of their assets, typically between 10% to 25%, is invested in equity and equity-related instruments. As per SEBI’s guidelines, the equity component cannot exceed 25%, and the debt portion must be between 75% to 90%. This composition offers a cushion against stock market volatility while still allowing some growth through equities.

One of the key advantages of Conservative Hybrid Funds is their ability to provide returns that are typically higher than those of fixed deposits and other debt instruments. Over the past 1 year the top 5 funds in the category have generated annual return of over 9%. 3-year and 5-year CAGR for the category has been ~10.5% as on June 2025 and the top 4-5 funds have generated over 12% returns. Additionally, the debt-heavy portfolio ensures lower volatility compared to pure equity or aggressive hybrid funds. These funds would rarely provide negative returns after a 12 to 18 month holding period.

These funds are ideal for:

1.       Risk averse investors wanting limited equity exposure

2.       Retirees

3.       Investors looking for higher returns than traditional debt instruments

4.       Investors with a two-to-four-year horizon who want to avoid taking full equity risk

Despite their conservative nature, investors should remain aware of certain risks associated with these funds. Interest rate risk can affect bond prices in a rising rate environment. There is also credit risk if the fund holds lower-rated debt instruments. The equity allocation, although limited, can still introduce some volatility to the net asset value (NAV).

From a taxation standpoint, these funds are treated as debt funds, which means post April 2023 any gain whether short term or long term would be taxed at the slab rate of the investor. Instruments such as PPF provide tax free returns of 7.2% which would be similar or higher to the after-tax returns of a hybrid debt fund; however, PPF is primarily illiquid and has a long lock-in period. Investors in higher tax brackets can alternately look at Balanced Advantage Funds that offer taxation at the same rate as equity mutual funds; however, they are riskier and volatile compared to Conservative Hybrid debt funds.

ICICI Pru Regular Saving Scheme, Parag Parikh Conservative Hybrid fund, Kotak Debt Hybrid, SBI Hybrid Debt, HDFC Hybrid Debt are amongst the funds in the category that have the largest AUM. These are also amongst the better performing schemes in this category.

In conclusion, Conservative Hybrid Mutual Funds offer a smart and balanced investment route for those who prioritize stability but also want to beat inflation and earn more than traditional debt instruments. These funds are particularly helpful for investors looking to generate income with lower risk and modest capital appreciation.