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Low-risk funds are tailored for investors who prioritize capital preservation and stable, predictable returns. In India, these funds have become a preferred choice for conservative investors, retirees, and those seeking short- to medium-term goals. In this blog, we will explore the different types of low-risk funds.

Types of Low-Risk Funds

Mutual Fund Categories

Low-risk funds invest in assets that have no to minimal risks. To compare funds, here are some categories of low risk funds:

  • Overnight Funds: These funds primarily invest in debt instruments that mature in one day. Examples include Quant Overnight Fund, Bank of India Overnight Fund, and Axis Overnight Fund. 
  • Liquid Funds: These funds offer low volatility and high liquidity by investing in very short-term money-market instruments with maturities as short as 91 days.
  • Ultra-short Duration Funds: These funds invest in debt and money market instruments for a duration between three to six months.
  • Arbitrage Funds: Arbitrage funds are hybrid funds that have a low-risk profile and capitalize on profit from price differentials between the cash and derivative markets. 

Where Do Low-Risk Funds in India Invest?

Low risk mutual funds in India primarily invest in a range of instruments known for their stability and lower volatility. Some types of low-risk funds are:

Debt Instruments

A major portion of low-risk mutual funds in India is invested in debt instruments. These include:

  • Government Bonds: These are considered among the safest investment options as they are backed by the government. Returns from government bonds are generally consistent over time.
  • High-rated Corporate Bonds: Low-risk funds also invest in high-rated corporate bonds, which indicate a lower default risk. Corporate bonds generally offer potentially higher returns than government bonds, with the risk depending on the issuing company’s financial health. 
  • Treasury Bills (T-Bills): These are short-term debt instruments issued by the Reserve Bank of India on behalf of the government. They have maturities of 91, 182, and 364 days. Because of government support, they are regarded as quite safe.
  • RBI Floating Rate Savings Bonds: These bonds offer an attractive interest rate; for example, RBI declared 8.05% will be its interest for its floating rate savings bond (FRSB) for the period between July and December 2025. They are considered a good option for conservative investors.

Other Low-Risk Investment Options

Beyond mutual funds, several other instruments are considered low-risk in India:

  • Bank Fixed Deposits (FDs): FDs are widely regarded as one of the safest investment options, offering assured returns for a fixed tenure. They are simple to understand and provide predictable returns.
  • Public Provident Fund (PPF): PPF, a government-backed savings plan with a 15-year lock-in period, is an attractive option for long-term investments as it provides tax benefits and guaranteed returns.
  • Gold Investments: Gold is often considered a hedge against inflation and economic uncertainty and can provide decent returns over the long term, making it a moderate to high-return, low-risk option. 
  • High-Interest Savings Accounts: These accounts, offered by private and small finance banks provide a safe haven for money with moderate returns due to RBI regulation and deposit insurance. They offer excellent liquidity and are ideal for emergency funds.
  • Annuities: Primarily designed for retirement planning, annuities involve a contractual agreement with an insurance company where a lump-sum payment or regular contributions lead to a predictable income stream at predetermined intervals, mitigating the risk of outliving savings.
  • Unit Linked Insurance Plans (ULIPs): Debt-focused ULIPs invest primarily in fixed-income securities, aiming to minimize risk and provide stable returns while combining insurance coverage and investment growth.

Conclusion

Low-risk mutual funds in India serve as a solid foundation for financial planning, offering a good mix of safety, liquidity, and predictable returns. By investing in government securities, high-rated corporate debt, and short-term money market instruments, these funds create a low-volatility environment for investors’ capital to grow modestly and steadily.