Conservative Hybrid Funds vs. Fixed Deposits? Know the Pros and Cons

For conservative investors, who generally prefer stability over volatility, this often means exploring instruments that offer a balance of caution and potential. One such option is Conservative Hybrid Funds.

Aug 2025 - 4 mins read

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When the stock market is volatile, many investors especially those with a low-risk appetite-start looking for safer investment options. For conservative investors, who generally prefer stability over volatility, this often means exploring instruments that offer a balance of caution and potential. One such option is Conservative Hybrid Funds.

Traditionally, Fixed deposits (FDs) have long been a preferred choice for such investors. They offer fixed returns, carry minimal risk, and are easy to understand. But with changing interest rate trends, inflation concerns, and evolving tax structures, some investors are now considering whether Conservative Hybrid Funds can play a similar role in their portfolios. Let’s find out!

What Are Conservative Hybrid Funds?
Conservative Hybrid Funds primarily in debt instruments, such as government securities or corporate bonds, along with a smaller portion in equities. As per SEBI regulations, these funds allocate around 75–90% of their portfolio to fixed income instruments and the remaining 10–25% to equities. Some funds may have the provision to invest up to 10% in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as well.

The idea behind this structure is to give investors a product that offers relative stability through the debt portion, while the limited equity exposure helps in generating some growth over the long term. This mix makes Conservative Hybrid Funds a middle ground-relatively less volatile than Equity Funds, but potentially more rewarding than pure Debt Funds.

How are Fixed Deposits Different?
Fixed deposits are savings instruments offered by banks and Non-Banking Financial Companies (NBFCs). They allow investors to park their money for a fixed period at a predetermined interest rate. FDs are simple, come with minimal risk, and offer predictable outcomes. Deposits of up to Rs 5 lakh in scheduled banks are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which adds an extra layer of security.

FD interest is taxable as per the investor’s income tax slab and may be subject to tax deduction at source (TDS) if the interest earned exceeds a threshold.

Comparing the Two Options

Feature	Fixed Deposits	Conservative Hybrid Funds
Returns	Fixed, declared at the time of deposit	Market-linked, can vary over time
Risk	Very low; principal protected	Moderately high risk; linked to market performance
Liquidity	Premature withdrawal possible with penalty	Redeemable in ~2 working days, subject to exit load, if any
Taxation	At the individual tax slab rate	At the individual tax slab rate
Cost/fees	No annual fees	Expense ratio (capped at 2% annually, depending of fund’s AUM)
Insurance	Up to ₹5 lakh insured by DICGC	No insurance; subject to fund performance

An important aspect to note with regards to taxation is that investors don’t have to pay any tax until they redeem from Conservative Hybrid Funds. Thus, as the holding period increases in Conservative Hybrid Funds, you potentially gain from compounding benefits as the gains remain reinvested in the scheme, if you opt for growth option. Thus, the tax payment is deferred till the year of redemption.

On the other hand, if you opt for a one year fixed deposit, the gains from maturity become taxable at your slab rate. In case of fixed deposits, the bank charges Tax Deducted at Source (TDS) if annual interest income exceeds Rs.40,000 (less than 60 years of age) and Rs.50,000 for senior citizens.

While fixed deposits are more straightforward and secure, Conservative Hybrid funds offer a slightly wider range of outcomes-both in terms of risk and potential return. The equity portion in hybrid funds introduces some level of fluctuation, but it also offers an opportunity for better inflation adjustment over the long term.

What Should Investors Keep in Mind?

Assess their time horizon: Conservative Hybrid Funds may require a longer holding period (at least three years) to smooth out short-term fluctuations.
Understand the product: It’s important to review the fund's asset mix, risk profile, and expense ratio.
Be realistic about expectations: Returns in Conservative Hybrid Funds are not fixed and can vary across market cycles.

While Conservative Hybrid Funds are not a direct replacement for fixed deposits, they can play a complementary role in a conservative investor’s portfolio. While FDs continue to offer safety and simplicity, Conservative Hybrid Funds provide a way to participate in market-linked growth with a relatively measured risk profile.

Even at a lower volatility, Conservative Hybrid Funds score over Fixed Deposits. Over a five year period, the category average return of Conservative Hybrid Funds stood at 9.05% (as of August 7, 2025) while the average FD return stood at 5.99% during the same period.

Hence, an investor in the highest tax category (30%) would earn a post-tax return of 6.33% in Conservative Hybrid Funds while 4.19% in fixed deposit. (Excluding health and education cess.) As you can see, Conservative Hybrid Funds have delivered an alpha of 2.14 percentage point over this period.

With a thoughtful allocation, investors can manage risk while also aiming for more efficient outcomes over time. Seeking guidance from a financial advisor can help in making informed choices that align with one’s financial goals and comfort with risk.

To sum up, Conservative Hybrid Funds score over traditional FDs in terms of liquidity, diversification benefits, no lock-in period and potentially higher returns.

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