Low Risk Mutual Fund

6 mins read
by Angel One

Indians have always picked investments that ensure the safety of their money and deliver forecasted returns. This is one of the important reasons why fixed deposits and recurring deposits are becoming increasingly popular in the country.

You may also invest in FDs and RDs at banks, which are considered to be the safest places to put the money. Because most of the AMCs are unknown to many investors, mutual funds have failed to gain the level of confidence.

Mutual funds have also been affected because many individuals fear that they might lose money. After all, returns are not guaranteed. They also say that mutual funds are subjected to market risk.

Because of all of these factors, mutual funds are not considered as a safe investment option in the way that bank fixed deposits are. However,ed mutual funds can provide you with inflation-beating returns if you understand investments and invest accordingly to your financial goals and risk profile.

What are Low-Risk Mutual Funds?

Many mutual funds fall within the category of low-risk mutual funds. Low-risk mutual funds include overnight funds, liquid funds, ultra-short duration funds, low duration funds, and money market mutual funds. Risk-free mutual funds, on the other hand, are not available.

As their name indicates, low-risk mutual funds are investment solutions with low risk and a predictable return.

Choosing the greatest low-risk mutual funds can assist an investor’s portfolio’s risk-reward ratio to remain stable. Real estate, government bonds, and other types of investments are the most common. These funds are constantly ahead of the curve when it comes to inflation. They do it by investing a significant portion of their total assets in debt instruments.

Low-Risk Mutual Fund Characteristics

The top low-risk mutual funds have the following characteristics:

  • Reduced Risk Exposure: The primary benefit of these investment vehicles is their notably low-risk profile. These funds effectively eliminate credit risk and are less impacted by the fluctuations of interest rates. Moreover, they are typically designed to counterbalance inflationary impacts, safeguarding the investor’s returns.
  • Focus on Maintaining Capital: As the purchasing power of money can diminish over time due to inflation, these funds emphasise conserving the capital value. By investing in assets of superior quality, they ensure that capital preservation remains a top priority.
  • Balanced Growth Strategy: Although the main intention is often to maintain capital, these funds seek balanced growth by incorporating a mix of top-tier debt securities and money market instruments. This balanced approach is intended to foster a secure investing climate while yielding consistent returns with lower risk.
  • Stability over Speculation: By steering clear of more volatile stocks, these funds choose safer asset classes with set coupon rates and established redemption periods. This strategy tends to result in reduced market volatility, making these funds a match for investors with a more cautious approach to investing.

Who can invest in a Low-Risk Mutual Fund?

If you’re a cautious investor, low-risk mutual funds can be a good option. It focuses on capital preservation and providing consistent income. Low-risk mutual funds include liquid, ultra-short duration, and money market mutual funds. Short-term securities like Treasury bills, commercial paper (CP), deposit certificates, and other debt instruments are held by liquid funds. It has a 91-day maturity period and exclusively invests in high liquidity and high credit grade assets. You can invest in liquid funds if you have a three-month investing horizon. In comparison to bank fixed deposits, liquid funds have a longer holding term and an easier exit option.

If you want to protect your money while earning a monthly income, money market funds are a good option. It has a very high level of liquidity and provides a consistent income. However, compared to liquid money, it is riskier. When compared to bank fixed deposits, ultra-short duration funds may give a better return. If you have a one-year investment horizon, money market funds may be a good fit for you. It invests in short-term money market securities that are less susceptible to interest rate risk.

Taxability on Low-Risk Mutual Fund

Long-term Capital Gains Tax:

Returns on the finest low-risk mutual funds are taxed at a flat rate of 20% with indexation advantages if held for longer than three years.

Short-term Capital Gains Tax:

If an individual sells assets before the 3-year threshold, the proceeds are added to their annual income and taxed at the corresponding slab rate.


Tax deducted at source, or TDS, does not apply to low-risk mutual funds.

To account for inflation, the indexation benefit adjusts the purchase price of a low-risk mutual fund, such as a liquid fund or an ultra-short duration fund. It aids in the reduction of long-term capital gains and tax savings. Dividends from low-risk mutual funds are deducted from your taxable income. You must pay taxes based on your income tax bracket. If you fall into one of the higher income tax brackets, you may be able to make a more tax-efficient income than bank fixed deposits.

Disadvantages of Low-risk mutual funds

If you invest in low-risk mutual funds, you have very little credit and interest rate risk. Low-risk funds, on the other hand, are subject to inflation. Inflation is the gradual increase in the price of services and products. It invests your money in AAA-rated, high-credit-quality bonds having a one-year maturity. When the money you get from an investment is adjusted for inflation, you face inflation risk. Purchasing power risk is another name for it.

Inflation risk affects low-risk mutual funds by eroding the investment’s actual value. Fixed income instruments have the biggest inflation risk, such as bonds, bank FDs, and corporate fixed deposits. Investors are paid a certain amount of interest on a regular basis, and the principal amount is refunded when the fixed income instrument matures.

Advantages of investing in low-risk mutual funds

Investing in low-risk mutual funds has the following advantages:

  • To reach your short-term financial goals, you might invest in low-risk mutual funds.
  • It allows you to earn a consistent income while still safeguarding your assets.
  • If you are in the upper income tax bands, it is a more tax-efficient investment than a bank fixed deposit.
  • When compared to a bank fixed deposit, you can obtain a better return.
  • In the event of a financial emergency, you can liquidate your investment.
  • The greatest low risk mutual funds can also serve as a secondary source of income in addition to protecting your wealth.


Mutual funds are very safe and secure investments if people have the knowledge and understand them. Short-term variations in returns should not be a worry while investing in equity funds. You should invest in a mutual fund that meets your long-term investment objectives.

It’s a good idea to do some research on mutual funds and learn more about them before investing. Various types of mutual funds, such as aggressive, moderate, and cautious, are appropriate for various types of investors.


How to invest in low-risk funds?

Log into Angel One and choose a liquid fund that matches your risk preference. If you’re new, sign up by submitting the required documents. Research your chosen fund’s performance and risks in the app, then invest via SIP or lump sum in the Mutual Funds section. Use AutoPay for recurring SIP investments.

Why invest in low-risk mutual funds?

Low-risk mutual funds are ideal for preserving capital and earning consistent returns, suitable for cautious investors preferring stability over high volatility.

What makes a mutual fund low-risk?

Mutual funds are low-risk when they invest in stable, high-quality securities with less exposure to market fluctuations, focusing on capital preservation.

Are low-risk mutual funds safe?

Low-risk mutual funds are relatively safe, prioritising capital preservation and offering steadier returns, though no investment is completely risk-free.