Conservative Mutual Fund Investing

Conservative mutual funds are low-risk funds that are designed to match or slightly outpace the average rate of inflation. Conservative funds are best for investors who have low tolerance for risk or are either near retirement or currently retired.

If you're a conservative investor, or think that you should be, find out the best way to invest conservatively with mutual funds. You may also want to learn how to build your own conservative portfolio with a diverse selection of funds.

Conservative Mutual Funds Definition

Mutual funds that are conservative are commonly referred to as "conservative-allocation funds" because they have an allocation (mix of stocks, bonds and cash) that is relatively low in risk. Conservative portfolios usually seek to provide both capital appreciation and income for the investor.

Conservative allocation funds tend to hold smaller amounts of stocks than moderate-allocation portfolios and are significantly lower in risk than aggressive fund portfolios. Conservative allocations typically have between 20% and 50% of portfolio assets in stocks and 50% to 80% of assets in a combination of bonds and cash.

Who Should Invest in Conservative Mutual Funds?

A conservative portfolio is appropriate for an investor with a low risk tolerance and a time horizon from immediate to longer than 3 years. Conservative investors are not willing to accept periods of extreme market volatility (significant ups and downs in account value) and are seeking returns that match or slightly outpace inflation.

Sample Conservative Portfolio of Mutual Funds

Investors can build their own conservative portfolio of mutual funds with a balanced blend of various mutual fund types from different fund categories.

Here's an example of a conservative portfolio made up of five funds. The asset allocation is 25% stocks, 45% bonds and 30% cash (money market). 

15% Large-cap stock (Index)
05% Small-cap stock
05% Foreign Stock
50% Intermediate-term Bond
25% Cash/Money Market

Best Conservative Allocations Funds

One of the best conservative allocation funds with a history of stable returns that have historically averaged above the rate of inflation is Vanguard Wellesley Income (VWINX). For example, one of the worst years for stocks was 2008, when the S&P 500 Index declined by 38.49%. VWINX had a loss of only 9.8%, which beat most conservative allocation mutual funds.

As of Nov. 2020, the long-term return (10 years) was 7.8%. In different words, a patient investor who doesn't mind an occasional loss of around 10% in one year out of about 10 years, but still get average annualized returns significantly above the rate of inflation can consider VWINX.

If you want to build your own portfolio like Vanguard Wellesley Income, a smart way to do it is to buy index funds and allocate them in a similar way as VWINX. The asset allocation for Wellesley usually ranges somewhere around 35% stocks, 60% bonds and 5% cash.

Bottom Line on Conservative Investing

Before deciding to make your investment objective a conservative one, be sure to know your priorities. If your objective is to grow your money over time, you may need to increase your exposure to stocks and invest in a moderate-allocation fund or create a moderate mix of mutual funds (i.e. 60% stocks, 35% bonds and 5% cash).

If your priority is guaranteed principal and no market risk, and you don't mind earning near-zero interest, mutual funds are probably not the best choice of investment vehicle. But if you want to keep up with (or outperform) inflation with your investments, and you don't mind taking low degrees of market risk, conservative mutual funds and allocations can be a wise choice.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.