Low Risk Funds

About Low Risk Mutual Fund

A low-risk mutual fund is an investment vehicle that has minimal risk with stable return assurance. The investments are broadly ventured into government bonds, real estate, etc. Low-risk mutual funds are typically ahead of inflation. In order to facilitate this, the fund manager invests a majority portion of the assets into debt instruments. By selecting low-risk mutual funds investors would be able to complement the risk-reward ratio in their portfolio. The investing strategy of these funds is inclined toward protecting the downside. One of the ways to mitigate downside protection in a low-risk mutual fund is to have a balanced mix of different asset classes like Equity, Debt & Gold.

How do Low Risk Mutual Funds Work?

Low-risk mutual funds aim for stability by investing in conservative assets such as bonds, money market instruments, or dividend-yielding stocks. These funds pool capital from various investors and utilise a professional fund manager for investment choices. The manager selects a diversified portfolio of conservative assets to reduce the chance of substantial losses. Investors in low-risk mutual funds receive returns through dividends, interest earnings, or capital appreciation. These funds are perceived as safer since they prioritise preserving capital over aggressive growth. However, they typically offer less potential for returns compared to higher-risk investments like equities.

Features of Low Risk Mutual Funds

1. These funds predominantly have their scheme allocation in government bonds, real estate, infrastructure, treasury bills, debentures, etc. low-risk mutual funds are one of the best SIP plans to invest in the market considering the fact that there are minimum risks involved.
2. Given the fact that the asset classes are largely invested in government bonds, debentures, treasury bills, and money market instruments, low risk mutual funds may yield better returns.
3. High credit rated instruments are taken into consideration by the fund managers to perform their analysis across various securities and invest in them based on historical returns. Fund managers invest in less volatile sectors when compared to equity funds. An average low risk mutual fund duration can vary between 3 months to 3 years for short duration schemes. Whereas, for medium-term funds, the duration is usually 3-5 years.

Advantages of Low Risk Mutual Funds

Low risk mutual funds have certain unbeatable benefits that other market vehicles cannot provide:

• Increased Liquidity: Low risk mutual funds enhance liquidity compared to other low liquidity funds and are less likely to run into a cash crunch during a financial crisis. Investors can tap into their money whenever required in case of emergencies.
• Minimal risk: These funds possess minimal risk and that makes them the perfect choice for investors looking to meet their short-term financial goals without hampering their returns. Low-risk funds also manage to offset the effects of inflation.
• Better performance compared to FD: When it comes to investing with minimal or no risk, traditionally investors tend to bank fixed deposits. Nevertheless, Low risk mutual funds offer the same secure feeling as an instrument on the investment capital by also offering increased returns.

Risk of Low Risk Mutual Funds

As the name suggests, a low risk mutual fund carries very minimal risk or no risk at all. Given the nature of investment and the instruments involved, a low risk mutual funds typically generate risk free returns for the investor.

Some of the popular categories of low-risk mutual funds that possess minimal risk are:

• Banking & PSU
• Liquid funds
• Ultra-short duration funds
• Low duration funds
• Gilt funds

Factors To Consider Before Investing in Low Risk Funds

1. Objective and Time Horizon: Determine your investment goals and how long you plan to invest. Low-risk mutual funds are typically suited for short to medium-term goals.
2. Risk Tolerance: Assess your risk tolerance to ensure it aligns with the fund's risk level. Low-risk funds aim for stability, but there is still some risk involved.
3. Expense Ratio: Lower expense ratios mean you keep more of your returns. Look for funds with competitive fees.
4. Performance History: Review the fund's historical performance to gauge its consistency and ability to achieve steady returns.
5. Diversification: Ensure the fund is adequately diversified across different asset classes to reduce risk. A well-diversified portfolio can enhance stability.

By considering these factors, you can make informed decisions when investing in low-risk mutual funds.

Who Should Invest in Low Risk Mutual Funds?

If you are a conservative investor, then you may choose to invest in low-risk mutual funds. Low-risk mutual funds could be a good fit for those investors who are new to investing and who do not know the schematics of other mutual fund options present in the financial world. Such new investors could be labelled as having a limited or low-risk appetite. And due to these reasons, a debt instrument could be ideal for any person who is aiming for the same level of security as a fixed deposit but expects slightly higher returns. A low-risk mutual fund helps in maintaining high liquidity in an investor’s portfolio. There are a few factors to be considered for investors before investing in a low-risk mutual fund:

1. Time Duration: Investors who are looking to park their money for a period of up to one year can explore a low-risk mutual fund as an investment option as they aid in achieving their short term financial goals.
2. Investment Objective: Just like any other mutual fund, investors have to evaluate their investment portfolio, and asset allocation percentages before opting for a low-risk mutual fund and choose it only if it is in line with their objectives and time duration.
3. Risk Appetite: High liquidity is a form factor of a low-risk mutual fund and is not impacted by credit risk. That said, investors need to know and understand that a low-risk mutual fund is not resistant to inflation which could result in a decline in estimated returns. It is crucial that investors consider their risk exposure to evaluate losses or diminishing returns when there is underperformance in a scheme.

Taxability of Low Risk Mutual Funds

The taxability of low risk mutual funds remains the same as how we tax debt funds. It is taxed as per the investor’s income tax slab after a holding period of 36 months. If the holding period exceeds 36 months then the fund is taxed at 20% with an indexation benefit. Indexation benefit enables investors to inflate the purchase price to account for inflation adjustment. Tax liability on these funds would completely depend on one’s income tax slab. Investors should be keen to earn a tax-efficient income as compared to fixed deposits if they fall under the highest income tax slab rate. When an investor earns dividends on theirlow risk mutual fund investments, the dividends are included in their taxable income and subject to taxation based on their income tax bracket. That said, tax deducted at source or a TDS of 10% is imposed when the dividend amount is more than ₹5,000 from any single mutual fund.

How to Invest in Low Risk Mutual Funds?

Investing in Low-Risk Mutual Funds through your Angel One account is a straightforward process. Follow these steps to get started:

Step 1: Begin by logging into your Angel One account using your registered mobile number. Verify the OTP and enter your MPIN.

Note: If you don't currently hold a Demat account with Angel One, you can swiftly open one by completing the KYC process and providing the necessary documentation.

Step 2: Now, it's time to select the most suitable low-risk fund based on your financial requirements. You can assess each fund within the mutual fund section on the Angel One app. Consider the following factors during this stage:

• Search for the specific low-risk fund you wish to invest in or take recommendations from funds listed by Angel One across different categories with lower risk profiles
• Analyse the fund's historical performance, tax implications, sectors, and stocks it comprises with an emphasis on stability and security.
• Calculate the potential returns using the provided calculator, keeping in mind the lower risk associated with these funds.
• Evaluate the fund's rating from reputable agencies, usually falling within the lower risk spectrum.
• Consider the fund's expense ratio, which tends to be relatively lower in low-risk funds.

Step 3: Once you've decided on the low-risk fund(s) you want to invest in, navigate to your Angel One account, access the Mutual Funds section, and locate your chosen low-risk fund. As these funds are generally suitable for conservative investors, take the following steps:

• Decide whether you want to invest a lump sum or opt for a monthly SIP (Systematic Investment Plan) for a steady, low-risk approach.
• Enter the desired investment amount and select your preferred payment method, with UPI being a secure choice.
• If you've chosen the SIP route, set up a mandate for hassle-free future instalments.
• By following these steps, you can easily invest in low-risk Mutual Funds through your Angel One account while prioritising capital preservation and stability.

Top 5 Low Risk Mutual Funds to Invest in

Note: The above-mentioned top low risk mutual funds are for informational purposes only and are not recommendations. The funds are based on a 3-year CAGR as of January 9, 2025, which is subject to change frequently. Check out real-time data on Angel One.

Invesco India Arbitrage Fund

Invesco India Arbitrage Fund is designed for low-risk investors seeking stable returns. With an expense ratio of 0.39%, it operates efficiently by keeping costs minimal. The fund boasts a high Sharpe ratio of 3.89, reflecting strong risk-adjusted returns compared to the category average of 3.52. Its PE ratio of 32.40 is in line with industry standards. 

Managed by Invesco, a globally renowned asset manager present in 25 countries, the fund offers a reliable investment option backed by a strong team and ₹1,05,608.74 crore in total assets under management.

Kotak Equity Arbitrage Fund

Kotak Equity Arbitrage Fund caters to risk-averse investors seeking consistent performance. The fund has an expense ratio of 0.43%, maintaining cost efficiency. Its Sharpe ratio of 4.04 surpasses the category average, showcasing superior risk-adjusted returns. With a PE ratio of 38.42, the fund is well-aligned with its equity holdings. 

Managed by Kotak Mahindra Asset Management Company, a subsidiary of Kotak Mahindra Bank, the fund combines the trust of a leading financial institution with the expertise to deliver stable returns.

ICICI Pru Equity-Arbitrage Fund

ICICI Pru Equity-Arbitrage Fund offers a secure investment avenue with an expense ratio of just 0.35%, one of the lowest in the category. Its Sharpe ratio of 3.82 highlights strong risk-adjusted returns, and a PE ratio of 32.57 ensures balanced equity exposure. Backed by ICICI Prudential Asset Management Company, a joint venture between ICICI Bank and the UK-based Prudential Plc, the fund benefits from robust management and expertise. 

HDFC Arbitrage Fund

HDFC Arbitrage Fund can be a good choice for investors prioritising safety with steady growth. With an expense ratio of 0.41%, the fund manages costs effectively. Its Sharpe ratio of 3.83 reflects its ability to deliver strong risk-adjusted returns, while a PE ratio of 33.71 ensures well-diversified equity exposure. 

Managed by HDFC Asset Management Company, a joint venture between HDFC and Standard Life Investments, the fund is backed by one of India's most trusted financial brands, offering low-risk investments with ₹7,64,728.25 crore in assets.

SBI Overnight Fund

SBI Overnight Fund is a low-risk mutual fund designed for those seeking short-term liquidity with minimal volatility. It features an exceptionally low expense ratio of 0.07%, ensuring cost-effective management. The fund delivers a yield to maturity of 6.66% and boasts a high Sharpe ratio of 39.33, indicating strong risk-adjusted returns. Managed by SBI Mutual Fund, India’s largest asset manager, this fund can suit conservative investors aiming for secure and predictable returns without any lock-in period.