What are Low Risk Mutual Funds?

Discover everything about low-risk mutual funds in this blog, which, as the name implies, are funds with minimal risk.
Low-Risk Mutual Funds
4 mins
29 January 2024

Low-risk mutual funds are investment options with minimal risk when compared to high-risk equity schemes. Low-risk funds are majorly debt funds that invest across government schemes, money market instruments, etc. These funds prioritise capital preservation and aim to provide stable returns with minimal exposure to market volatility. They primarily invest in debt securities, money market instruments, government bonds, and other fixed-income assets, which are considered less risky than equities or high-risk investments.

What are Low Risk Mutual Funds?

Mutual funds with low risk provide relatively stable returns, although they aren't entirely risk-free. Despite this, they offer higher returns and are more tax-efficient than traditional investments like fixed deposits, making them suitable for investors cautious about risks.

Among low-risk mutual funds, debt funds invest in money market instruments and government bonds, lowering the associated risk. Various categories exist within debt funds, including liquid funds, dynamic bond funds, gilt funds, and ultra-short-term funds.

Debt funds typically carry some level of interest rate and credit risk. However, selecting bonds with higher ratings helps mitigate these risks.

Due to their minimal risk and focus on providing optimal returns, these funds serve as a favorable option for parking surplus funds over short durations.

Features of low-risk mutual funds

  • Minimal risk: One of the biggest advantages of these funds is that they face minimal risk. Credit risk is eliminated for these options. Additionally, interest rate fluctuations do not hamper returns from these instruments. In most cases, low-risk funds also manage to offset the effects of inflation.
  • Capital preservation: Inflation can erode the value of money over time, making capital preservation a crucial concern for investors. These funds invest in high-quality assets, prioritizing the safety and security of capital.
  • Capital appreciation: While the primary goal of any investment is capital appreciation, these funds strike a balance by selecting highly-rated debt and money market assets. This approach aims to ensures a secure investment environment and provides moderate and stable low-risk returns.
  • Lower volatility: These funds veer away from equities and instead opt for more secure assets with pre-defined coupon rates and maturity dates. As a result, these funds exhibit lower volatility and are favourable for risk-averse investors.

Advantages of low-risk mutual funds

  • Stable returns: Low-risk mutual funds offer more or less stable returns. However, this doesn’t mean that the schemes are risk-free. Low-risk funds offer higher returns and are comparatively more tax-efficient than traditional investments like fixed deposits.
  • Asset allocation: Index funds closely track a benchmark’s Total Return Index (TRI) and invest in various equities, as well as debt instruments. As an index fund invests your money in all the securities that are tracked by the index, it offers a pre-mature diversified portfolio. However, for short-term investments, a significant portion of the corpus is allocated to debt instruments and money market-related assets. This strategic asset allocation ensures both diversification and adherence to investment guidelines.
  • Fulfilment of short-term goals: They are suitable for short-term financial objectives like saving for a vacation or buying a car.
  • Minimal risk: These funds prioritise capital preservation, ensuring that the investment remains relatively stable.
  • Source of regular income: Some low-risk funds provide regular dividends, offering investors a steady income stream.
  • Tax savings for certain income slabs: Investors in low-risk funds may benefit from tax advantages, especially in certain income tax brackets.
  • Higher returns compared to fixed deposits: While low-risk, they often offer better returns than traditional fixed deposits over the long term.
  • Enhanced liquidity: Investors can easily redeem their investment in low-risk mutual funds, providing flexibility in managing their finances.

Who are low risk mutual funds suited for?

Low-risk mutual funds are well-suited for a variety of investors who prioritise safety and stability in their investment choices. Here are some groups of people who may find low-risk mutual funds particularly beneficial:

  1. Conservative investors: Individuals who are risk-averse and prefer to preserve their capital rather than seeking high returns may opt for low-risk mutual funds. These funds offer stability and security, making them suitable for conservative investors.

  2. Retirees: Retired individuals often prefer investments that provide a steady income stream without significant fluctuations in value. Low-risk mutual funds, such as bond funds or money market funds, can offer retirees the assurance of regular income while minimizing the risk of losing their savings.

  3. Short-Term goal seekers: Investors with short-term financial goals, such as saving for a vacation, purchasing a car, or building an emergency fund, may find low-risk mutual funds appropriate. These funds provide a balance between safety and potential returns, making them ideal for achieving short-term objectives without exposing the capital to significant risk.

  4. First-Time investors: Those who are new to investing and are still learning about financial markets may prefer low-risk mutual funds as a starting point. These funds offer simplicity, stability, and ease of understanding, providing novice investors with a comfortable entry into the world of investing.

  5. Income seekers: Investors who prioritise regular income over capital appreciation may choose low-risk mutual funds that focus on generating dividends or interest income. These funds can serve as a reliable source of income, especially during retirement or when supplementing other sources of revenue.

Taxation on low-risk mutual funds

The tax implications of investing in mutual funds depend on the type of mutual fund, holding period, and the investor’s income tax bracket.
Here are the essential factors that affect the taxes levied on mutual funds:

  • Fund types: Taxation rules differ based on the type of mutual fund. E.g., debt mutual fund, hybrid mutual fund, etc.
  • Dividend: A part of the profit distributed amongst investors by mutual fund houses is called dividend.
  • Capital gains: When investors sell their capital assets at a higher price than its total investment amount, the profit is termed as capital gains.
  • Holding period: Time between the date of the purchase and sale of mutual fund units. As per the income tax regulations of India, if you hold your investment for an extended period, you will be liable to pay a low tax amount. Thus, the holding period influences the tax rate payable on your capital gains. The higher your holding period, the lesser tax you are liable to pay.

Dividends earned from mutual funds are also taxable. As per the amendments made in the Union Budget 2020, dividends offered by any mutual fund scheme are taxed in the classical manner.
Here’s a detailed look at the tax rates on capital gains from mutual funds:

Type of mutual fund

Holding period

Tax rate

Debt mutual fund

Less than 3 years (STCG)

Income tax slab rate

Debt mutual fund

More than 3 years (LTCG)

20% with indexation benefits


Step-by-step guide foe investing in low-risk mutual funds

Step1: Do research and assess risk - Start by exploring various low-risk mutual funds to grasp their investment approaches, past performance, fees, and asset types. Evaluate your risk tolerance and financial goals to ensure alignment with chosen funds.

Step 2: Set-up your account and pick funds - Open an account with a brokerage firm to begin investing in mutual funds. Select funds that match your risk tolerance and objectives, considering factors like fund size and manager experience.

Step 3: Determine your investment amount - Decide on the sum you want to invest, considering any minimum investment requirements some funds may have.

Step 4: Buy shares - Once your account is active, you can purchase shares of selected funds. You can either make a lump sum investment or opt for regular contributions through low-risk SIPs.

Step 5: Stay informed - Regularly monitor the performance of your chosen funds. While low-risk funds aim for stability, it is essential to periodically review your investments and make adjustments if needed.


In conclusion, low-risk mutual funds are an excellent investment option for conservative investors who prioritise stability over high returns. By investing in these funds, investors can enjoy steady returns while minimising their exposure to market risks.

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator
SIP Calculator FD calculator SDP calculator Gratuity Calculator Step Up SIP Calculator

Frequently asked questions

Which mutual fund has lowest risk in India?

There are several low-risk mutual funds in India that are considered to be good investment options. However, please note that while a funds may be considered low-risk, all investments carry some level of risk and past performance is not indicative of future results. It is always a good idea to do your own research or consult with a financial advisor before making investment decisions.

Which mutual fund is low-risk high-return in India?

In India, mutual funds that are considered low risk and high return are usually balanced, funds hybrid funds, liquid funds, overnight funds, etc. They invest in a mix of equity and debt, aiming to provide capital appreciation and income.

Are low-risk mutual funds safe?

Low-risk mutual funds are generally considered safer than high-risk funds due to their investment strategy. They typically invest in a mix of debt and equity, with a larger proportion in debt, which is considered less volatile than equity. However, it’s important to note that all investments carry some level of risk.
The term “low risk” refers to the relative risk compared to other investments. It does not mean there is no risk. The value of your investment can go up or down depending on market conditions, interest rates, and the performance of the individual companies the fund invests in.
It’s also important to consider your personal financial situation, investment goals, and risk tolerance when choosing an investment. What might be considered low risk for one person could be high risk for another depending on their financial circumstances and investment goals.
Always do your own research or consult with a financial advisor before making investment decisions.

How to pick the best low-risk fund?

To choose the best low-risk fund, consider factors such as historical performance, fund manager expertise, expense ratio, and the fund's investment objective. Analyse the fund's portfolio, assess risk metrics, and align it with your investment goals and risk tolerance.

What type of investment has the lowest risk?

Government bonds and Treasury securities are often considered investments with the lowest risk. These instruments are backed by the government, providing a high level of safety for investors. Additionally, certain low-risk mutual funds, like liquid funds or short-term debt funds, are also considered relatively safe.

How to invest in low-risk mutual funds?

To invest in low-risk mutual funds, start by researching and identifying funds with a track record of stable returns. Choose funds that align with your risk tolerance and financial goals. Once decided, you can invest through a reliable platform or financial institution by completing the necessary documentation.

Are low-risk mutual funds entirely risk-free?

While low-risk mutual funds offer stability, it is essential to note that no investment is entirely risk-free. Even low-risk funds, such as debt funds, carry some level of risk, such as interest rate and credit risk. Investors should carefully assess their risk tolerance and conduct thorough research before investing.

Show More Show Less