Best low-risk mutual funds

Mutual fund investments come in many formats, from short duration to long-term and even low-risk to high-risk options. Depending on individual preference and investment goals, one can opt for a mutual fund investment to generate appropriate returns. Here, we will explain the concept of low risk mutual funds and different types available within this category. 

What is a low-risk mutual fund?

As the name suggests, mutual funds that come with minimal risk factors are called Low-risk mutual funds. These funds tend to have relatively higher chances of assured returns since they primarily invest in instruments such as government infrastructure bonds, energy, real estate, etc. Since these funds invest a majority of their total assets into debt instruments, the investment horizon is relatively low. 

Common categories of low-risk mutual funds

1. Banking & PSU
2. Liquid funds
3. Ultra-short duration funds
4. Low duration funds
5. Gilt funds

Who should consider low risk mutual fund investment?

Mutual Funds that carry lower risk are mainly preferred by new investors who are unfamiliar with the markets and would like to take sufficient precautions to avoid investment risks. An investor whose risk appetite is low can choose a low-risk fund and earn better returns as compared to bank FDs, depending on the fund choice and investment time horizon.

Low-risk funds are ideal for investors who wish to earn optimal returns in a short duration since these are highly liquid with maturities ranging from 91 days to 1 year. Investors can also get the tax advantage through low risk mutual funds, especially while looking for alternatives of bank FDs.

Features of Low Risk Mutual Funds

Some of the noteworthy features of low-risk mutual funds are:

• Low Risk Mutual Funds aim to generate capital appreciation through short-term liquid investments.
• These fund schemes have comparatively higher chances of stable returns since the assets are primarily invested in Government bonds, debentures, treasury bills, money market instruments, etc.
• The fund managers of low-risk funds perform a critical analysis of various securities and invest in securities based on historical returns and credit ratings. The funds are usually invested in high credit quality instruments for generating assured returns.
• These funds invest in assets of less volatile sectors as compared to equity schemes.
• The investment tenure could range between 3 months to 3 years for short duration schemes. For medium-term funds, the duration is usually 3-5 years.

What is the tax treatment on returns from low risk funds?

Depending on the holding period of a debt fund investment, the returns generated can be subject to capital gains tax and also dividend distribution tax (DDT). Here are some of the important points to note on taxability:

1. If a debt fund investment is liquidated within 3 years of investment, the gains are taxable as per individual’s slab rate (short-term capital gains tax).
2. If a debt fund investment is liquidated after 3 years of purchase, the income is taxed at 20% and investors can get the benefit of indexation (which reduces the overall tax liability after considering inflation).
3. Dividends earned from mutual funds or stocks are taxable from 01 Apr 2020 onwards at the individual slab rate. There.will be a TDS of 10% when the dividend amount is more than Rs 5000 from any single mutual fund or stock.

Top performing low risk funds to invest in 2023

Some of the category-wise top performing low risk mutual funds to invest in 2023 are:

Liquid Mutual Funds

Liquid mutual funds invest in short-term money market securities with maturities of less than 91 days. These are ideal for investors who want to invest for a short duration combined with limited risk. Here is a list of top recommended liquid funds:

1. ICICI Prudential Liquid Fund

 This open-ended scheme mainly invests in money market and debt instruments with maturity of maximum 91 days. It has a low risk and high liquidity profile. 

Inception Date	November 17, 2005
Benchmark Name	Crisil Liquid Fund Index TRI
Fund Manager	Rahul Goswami, Rohan Maru, Priyanka Khandelwal
Expense Ratio	0.20%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
3.46%	4.75%	5.67%	6.20%	7.28%

Aditya Birla Sun Life Liquid
This is an open-ended liquid scheme that aims to provide reasonable returns combined with high safety and liquidity via investments in high-quality debt and money market instruments.

Inception Date	June 17, 1997
Benchmark Name	CRISIL Liquid TRI
Fund Manager	Mr. Kaustubh GuptaMs. Sunaina da Cunha
Expense Ratio	0.21%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
3.49%	4.80%	5.73%	6.25%	7.34%

Ultra Short-Duration Mutual Funds

These debt funds invest in debt and money market instruments with maturities ranging between 3 to 6 months. These come with relatively lower interest rate risk. Here is a list of top recommended ultra short-duration funds for investor reference:

HDFC Ultra S/T Fund
The scheme aims to generate income through investment in debt securities and money market instruments. It may be best suitable for investors looking to earn regular income with high liquidity. 

Inception Date	September 25, 2018
Benchmark Name	Nifty 50
Fund Manager	Anil Bamboli
Expense Ratio	0.24%

Historical Returns of the Fund (annualised)

1-Year	2-Year	Since Inception
5.58%	6.58%	7.17%

ICICI Prudential Ultra Short Term Fund
The scheme aims to generate returns from investments in debt and money market instruments. It is ideal for investors who want to park their funds for a short duration and earn regular income or maintain high liquidity.

Inception Date	May 03, 2011
Benchmark Name	Nifty Ultra Short Duration Debt Index TRI
Fund Manager	Manish Banthia, Ritesh Lunawat
Expense Ratio	0.39%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
6.73%	7.35%	7.75%	8.17%	8.77%

Low Duration Fund Options

Low duration funds allocate the majority of funds towards investment in short-term debt securities while maintaining the portfolio duration between 6 to 12 months. As compared to overnight and liquid funds, low duration funds invest in assets of longer maturity and lower credit quality. Here is a list of top recommended low duration funds for investor reference:

Axis Treasury Advantage
This scheme primarily invests in a mix of money market and short-term debt instruments such that the portfolio has a marginally higher maturity when compared to a liquid fund. It strives to maintain a reasonable balance between safety and liquidity. 

Inception Date	October 09, 2009
Benchmark Name	NIFTY Low Duration Debt IndexNIFTY 1 Year T-Bill Index
Fund Manager	Devang Shah
Expense Ratio	0.29%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
6.48%	7.48%	7.84%	7.71%	8.34%

SBI Magnum Low Duration Fund
The investment strategy of this scheme is to invest its corpus in a range of debt and money market securities. It aims to provide attractive risk-adjusted returns to investors while managing the credit risk and interest rate risk.

Inception Date	July 27, 2007
Benchmark Name	Nifty Low duration Debt Index
Fund Manager	Mr. Rajeev Radhakrishnan
Expense Ratio	0.40%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
5.76%	7.14%	7.47%	7.35%	8.01%

Banking & PSU Mutual Fund

Banking & PSU Funds invest primarily in debt instruments of banks, Public Sector Undertakings (PSUs) and Public Financial Institutions as defined by SEBI. 80% of the fund corpus is invested in debentures, bonds, and certificates of deposit of banks and PSUs. Here are the top fund recommendations under this category:

Axis Banking & PSU Debt Fund
This open-ended scheme aims to generate stable returns through investments in debt and money market instruments issued by banks, Public Sector Units & Public Financial Institutions.

Inception Date	January 01, 2013
Benchmark Name	NIFTY Banking and PSU Debt Total Return Index
Fund Manager	Aditya Pagaria
Expense Ratio	0.31%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
7.60%	9.31%	9.16%	8.48%	8.69%

Aditya Birla Sun Life Banking & PSU Debt Fund
The scheme aims to generate reasonable returns through investment focus in debt and money market securities that are issued by Banks, Public Sector Undertakings (PSUs) and Public Financial Institutions (PFIs) in India.

Inception Date	April 20, 2002
Benchmark Name	NIFTY Banking and PSU Debt Total Return Index
Fund Manager	Mr. Kaustubh GuptaMr. Harshil Suvarnkar
Expense Ratio	0.35%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
8.34%	9.81%	9.28%	8.72%	9.46%

Gilt Fund Options

Gilt Funds invest at least 80% of their corpus in government securities (G Secs) that have varying maturities. Investors who do not want to take on any risk may prefer these investment forms since these come with minimal or zero credit risk. Here are the top recommended gilt funds for investor reference:

UTI Gilt Fund
The fund aims to generate capital appreciation through investment in long-term government securities focusing on a falling interest rate environment. Investments are made primarily in highest rated instruments (like government securities) to limit the credit risk.

Inception Date	January 21, 2002
Benchmark Name	CRISIL Dynamic Gilt
Fund Manager	Amandeep Chopra
Expense Ratio	0.66%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
4.31%	10.10%	9.46%	9.42%	9.41%

Kotak Gilt Investment Fund
The investment objective of this fund is to generate risk free returns by investing in sovereign securities issued by the Central or State Government (s) or investing in reverse repos of such securities. It tries to actively manage the duration of investment to ensure minimal credit and interest rate risk for investors.

Inception Date	January 21, 2013
Benchmark Name	NIFTY All Duration G-Sec Index
Fund Manager	Mr. Abhishek Bisen
Expense Ratio	0.47%

Historical Returns of the Fund (annualised)

1-Year	2-Year	3-Year	5-Year	Since Inception
6.49%	11.24%	10.87%	9.33%	9.16%

Conclusion

Low risk mutual funds come with the advantage of a secure investment form that can act as an alternative source of income for many investors. These are preferred due to the benefit of lower market risk with adequate liquidity to meet emergency financial needs.

FAQs

1. How to pick the best low risk fund?
   Various factors can go into making a choice from available low-risk funds. Some of these are matching Investment horizon, Investment Objectives, Investment Style, checking historical returns of the fund, and fund managers’ experience. All of these must be weighed against personal financial needs before making an investment decision.

2. What type of investment has the lowest risk?
   Today, investors have multiple investment options to choose from. This combined with an unpredictable economic climate, it could be difficult to identify one investment option with the lowest risk. However, there are a few investment options that are considered safer than others. Some of these are: Certificate of Deposits, Bank Fixed Deposits or Low risk mutual funds
   
3. What are the benefits of investing in low risk mutual funds?
   Some of the major advantages of low risk mutual funds are:
   • Investors can meet their short-term financial goals through these investments
   • These provide better chances of regular income and help protect the investor’s capital
   • These are tax-efficient as compared to a bank fixed deposit for those under the higher income tax brackets
   • Easy liquidity of investment in case of a financial emergency

4. How to invest in low risk mutual funds?
   It is easy to invest in some of the top performing low risk mutual funds. An investor can download the Fisdom app on his/her smartphone to begin the investment process. Fisdom app provides easy and seamless mutual fund investment experience.

5. Are low risk mutual funds entirely risk-free?
   Every mutual fund investment has a certain degree of risk involved, some may have lesser risk while other funds may have higher risk. Low risk mutual funds are not entirely risk free as these are exposed to factors like market fluctuations, interest rate fluctuations, credit risk, etc.