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Who Should Invest in Low Risk Mutual Funds? Research Team | Posted On Thursday, January 23,2020, 05:20 PM

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Who Should Invest in Low Risk Mutual Funds?



What are Low Risk Mutual Funds?

Mutual funds with low credit risk are called low risk mutual funds. These funds invest in government securities like infrastructure bonds, real estate and so on. The low risk feature of these mutual funds ensures they stay ahead of inflation. Majority of assets are invested in debt instruments. Therefore, the investment tenure is low.

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Who Should Invest in Low Risk Mutual Funds?

Features of Low Risk Mutual Funds:

  • Short term funds have duration ranging from 3 months to 3 years, and medium term funds range from 3 to 5 years. This implies liquidity is high in this scheme.

Returns are guaranteed: These funds invest in secure instruments like government bonds, treasury bills, debentures, money market instruments and so on.

To ensure assured returns, fund managers carry out a thorough analysis of different securities and classify them on the basis of credit ratings and historical returns. Funds are then invested in high quality instruments.

See Also: How Mutual Funds Work?

Funds are Invested in Less Volatile Sector:

Considered to be ideal monetary reserves for capital appreciation.

Top 5 Low Risk Mutual Funds in India

Here is a list of top 5 low risk mutual funds recommended with low risk and high returns for the year 2020:

Fund Name


3 year Returns

5 year Returns

Axis liquid fund




HDFC short term debt fund




Indiabulls short term fund




Franklin India liquid fund




Aditya Birla SL money manager fund




Who Must Invest in Low Risk Mutual Funds?

  • These are the best fit for new investors. New investors seek low exposure to the markets and cannot bear high risk. They are more likely to be unaware on how the market functions.
  • Investors, who have low risk appetite, can earn more returns from low risk mutual funds, when compared to bank FDs.
  • These are funds with high liquidity. The maturity period usually ranges from 91 days to a year. Investors looking forward to high liquidity can opt for these funds.
  • Investors attracted to tax efficient funds, can invest in low risk mutual funds.

See Also: Mutual Funds with High Returns

Benefits of Low Risk Mutual Funds

  • Easy liquidity. Investing in low risk mutual funds helps meet urgent financial needs.
  • Market risk is low. This is an ideal option for investors who want to park their money in secure instruments.
  • Returns are moderate but stable. This makes it a secure and stable investment option.

When to Buy Low Risk Mutual Funds?

You must invest in low risk mutual funds, when you are not willing to bear risk. If you are not comfortable with risk, then low risk mutual funds are the best option.

It is an ideal scheme, if liquidity is the concern. These funds offer options with a short term and long term tenure. Opt for Short term funds if liquidity is your priority. It ensures steady moderate returns as mentioned earlier.

Mutual Fund Taxation:

Low risk mutual funds invest in government securities. Debt funds are subject to capital gains tax and Dividend Distribution Tax (DDT). The tenure of the investment plays a major role in deciding the tax slab. If debt funds are sold within 3 years, gains are taxed as short term capital gains tax. On the other hand, if they are sold after 3 years of purchase, they are taxed at 20%. In the second case, investors enjoy the indexation benefit.

See Also: Which Type of Mutual Fund Is Best to Invest?

Dividends received on debt funds are taxed with DDT of 25%. Adding surcharge and cess will increase DDT to 29%. The fund house deducts DDT on dividends before paying them to the investors. Therefore, dividends from debt funds are tax free in the hands of the investor.

However, when it comes to capital gains, there is no Tax deduction at source or TDS. Investors must calculate their tax liability and pay the same on capital gains.


Before investing in any instrument, make sure to study financial goals and the time period you have to achieve them. Based on this, you can decide which instrument to go for. Low risk mutual funds have three basic features: low risk, stable returns and liquidity. If your financial goals are in accordance with these features, then low risk mutual funds are a good option.

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