What are Conservative Mutual Funds

Conservative mutual funds are a type of investment that prioritizes capital preservation and steady income over high returns. They are a good option for investors who are risk-averse, want to avoid market fluctuations, or are nearing retirement. Conservative funds are typically made up of 75–90% debt securities and 10–25% equities.
EXPLORE FUNDS
What is conservative fund
EXPLORE FUNDS
3 min
21-November-2024

Conservative mutual funds are a type of balanced fund. When you invest in these funds, a significant portion of your investment is allocated to debt instruments. Typically, 75% to 90% of the investment is made in debt securities, while 10% to 25% is invested in equities. Conservative funds are ideal for individuals with a low risk appetite. These funds are a good option for risk-averse investors or those nearing retirement, as they are designed to be safer than equity-focused funds, with lower volatility.

Investing in mutual funds usually feels like a rollercoaster ride. Market uncertainties can make you nervous, but mutual funds are also very important as they provide various opportunities for growth in the financial market. While the overall market could be volatile, conservative mutual funds offer a beneficial solution for individuals seeking a balance of security and asset preservation. In the below article, we explore the characteristics, benefits, and meaning of conservative funds for investors looking to protect their capital.

What are conservative mutual funds?

If you are not a risk taker and prefer stability over aggressive growth, then conservative funds are just for you. For example, many senior citizens opt for fixed deposits in banks rather than mutual funds as they are worried about the risk associated with mutual funds and prefer steady growth from fixed deposits.

Conservative funds give more preference to low-risk assets such as government bonds and fixed-income securities while allocating funds. The main goal of conservative mutual funds is to protect your funds while generating moderate returns on those funds.

As per SEBI regulations, conservative funds are categorised as hybrid funds that manage to create a balance between security and moderate growth. In these funds, 10% to 25% of the investments are allocated to equity and equity-related instruments, while the rest of the 75% to 90% is allocated to debt instruments. This approach helps to keep your investment safe and protect it from market fluctuations.

Characteristics of conservative funds

  1. Allocation of funds:
    Conservative funds follow a traditional asset allocation policy. The majority of the funds are invested in fixed-income instruments to avoid major risks. Investments such as government bonds, certificates of deposit, and corporate bonds are some of the fixed-income instruments that are used in conservative funds.
  2. Risk management:
    The primary objective of conservative funds is to alleviate risk. In short, a conservative fund aims to protect the invested capital from market uncertainties. The fund manager has to prioritise the stability of the fund while ensuring steady profit, rather than chasing highly profitable and volatile investment opportunities.
  3. Income generation:
    In conservative funds, income is generated by collecting interest from fixed-income investments. This provides investors with a reliable source of income as it is useful for those who want financial stability.

Conservative funds that are available in the market

  • Money market funds: There are money market funds available that invest in short-term and highly liquid securities such as treasury bills and commercial paper. This helps to safeguard funds and provide a lower-risk as well as a lower-return investment alternative.
  • Short-Term bond funds: These are primarily invested in bonds with short maturity periods. These bonds are least sensitive to interest rate changes and provide stability to the fund. As an investor, you can receive regular interest payments from these bonds.
  • Ultra short-term bond funds: These funds invest in low-risk securities for a short period, much like their counterpart, short-term bond funds. This fund offers high returns by reducing the risk associated with interest rates.
  • Stable value funds: These funds are usually included in retirement plans. The funds are allocated to top-tier bonds and other low-risk bonds. These funds also provide consistent returns and protect the capital.
  • Capital preservation funds: Capital preservation funds aim to protect investments from significant losses. These funds prioritise low-risk investments to minimise volatility such as short-term bonds and cash equivalents.
  • Government bond funds: If you are a first-time investor, you can go for government bond funds as they invest in bonds issued by government entities. These bonds are relatively safe and aim to provide stability and steady income.
  • Target date funds: If you have planned a specific time for your retirement then target date funds are designed for you. Target date funds adjust their asset allocation over time and turn more conservative as the target retirement date approaches. This adjustment involves favouring a more stable income.
  • Risk-adjusted funds: Some funds explicitly focus on achieving a balance between risk and return, giving priority to a risk-adjusted strategy. The ultimate goal of these funds is to supply steady returns while effectively handling any potential downside risks.

These are some of the conservative funds available in the market. To explore more options you can check the Bajaj Finserv Mutual Fund Platform, which provides more than 1000 mutual fund options to choose from. Before investing it is important to understand the advantages and risks involved in various funds along with the utilisation of resources like SIP and lump sum calculator that contribute to a comprehensive investment strategy.

Investors who thrive with conservative mutual funds

  1. Aversion to risk and following a conservative approach:
    Investors who prioritise safety over high profit and prefer conservative investment can try conservative mutual funds. It will reduce necessary worries regarding the risk associated with mutual funds.
  2. Investors with a short to medium goal:
    If you have short to medium-term financial goals, then these funds can help in saving for those or help plan for an upcoming expense. These funds provide moderate returns along with stability.
  3. Saving for retirement:
    If you are planning your retirement, then this fund offers a balance between stability and growth for the long term. It prioritises the security of funds till the age of retirement.
  4. Steady income-seeking investors:
    The focus of conservative mutual funds is on fixed-income securities which can generate steady income. This is suitable if you rely on income from investments to meet your financial goals.
  5. First-time investors:
    Usually, first-time investors are looking for low-risk mutual funds. This fund will help in the introduction to the financial market, without worrying about the security of the fund.

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.

Essential tools for all mutual fund investors

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