Mutual Funds With Low Risk and Good Returns

Low-risk mutual funds are investment vehicles that focus on preserving the investor's original capital amount while also providing a steady and moderate return. In contrast to equity funds, which are volatile due to their direct stock market linkage, these funds allocate most of their money to less risky instruments, such as government securities, top-rated corporate bonds, arbitrage opportunities, and short-term debt instruments.

Types of Low-Risk Mutual Funds

• Debt Funds: The money is invested in fixed-income securities, such as government bonds, treasury bills, and corporate debt. They are attractive due to their reliability and the ability to predict returns.
• Arbitrage Funds: These funds identify opportunities in price differences between cash and derivative markets and take advantage of them to generate profits. Tax-wise, they are treated like equity but come with less volatility.
• Liquid & Overnight Funds: Super-safe funds meant for extremely short-term money parking. They provide quick liquidity, often within a day.
• Hybrid (Equity Savings) Funds: A balanced option combining stocks, bonds, and arbitrage strategies to give slightly higher returns while keeping risks controlled.

Reasons Why They Are the Safest Mutual Funds in India (2025)

• They allocate a significant portion of their investments to very stable and low-volatile assets.
• Recommended for conservative investors who prefer capital protection over rapid, high growth.
• Backed by a strong regulatory framework and diversified holdings, which greatly reduces the chances of deep drawdowns.

Investors typically prefer low-risk mutual funds, as they offer a balance between security and steady growth. Unlike high-risk equity-based funds, these selections prioritize the stability of the investment and are designed to safeguard funds earned through hard work, while also providing moderate returns.

Key Benefits of Low-Risk Mutual Funds

1. Capital Protection: Funds with low risk invest a significant portion in highly secure instruments, such as government bonds, corporate debt with high ratings, and arbitrage opportunities. This ensures that funds remain safe even during market declines, making them ideal for investors with very low risk tolerance.
2. Better Than Fixed Deposits: While fixed deposits are considered safe, they often provide limited returns. In comparison, low-risk mutual funds can generate returns of around 6–9% annually, along with tax efficiency and greater withdrawal flexibility.
3. Matching Short-Term and Conservative Investors: Whether you are a beginner, a senior citizen, or someone looking to park extra cash for a few months or a couple of years, these funds are a smart choice. They combine liquidity, safety, and stable returns, making them suitable for conservative investors or those with short-term goals.

For beginners or conservative investors, low-risk mutual funds that yield high returns can be a brilliant way to strike a balance between safety and growth. These funds generally invest in very safe instruments, like government securities, high-quality bonds, or arbitrage opportunities. As a result, they are not only more dependable than pure equity funds but also often provide better returns than fixed deposits.

Top Low-Risk Mutual Funds for Beginners (2025)

(Returns are approximate annualized figures as of 2025; past performance does not guarantee future results.)

Why These Funds Are Considered Safe

• Arbitrage Funds: Deliver steady returns by exploiting price differences in markets. They are considered safe, tax-efficient, and suitable for investors with a holding period of at least one year.
• Overnight Funds: Among the safest in the debt category, ideal for short-term parking of money with instant liquidity.
• Debt Mutual Funds: Many of the best debt mutual funds in India offer annual returns of 6–8% with very low volatility.

For anyone seeking a low-risk, high-return investment in India, these funds strike the right balance: they safeguard your capital, offer better liquidity than fixed deposits, and provide moderate yet consistent returns.

Low-risk mutual funds are not a single type of scheme—they come in different categories, each designed for specific goals and investment horizons. Let's look at the most popular ones in India.

Debt Mutual Funds

Debt mutual funds primarily invest in government securities, treasury bills, corporate bonds, and Public Sector Undertaking (PSU) debt instruments. Since they avoid high-risk equities, they are considered stable and predictable. The best debt mutual funds in India usually fall under short-duration, low-duration, or banking & PSU debt categories. These funds offer annual returns in the range of 6–8%, making them a suitable option for conservative investors seeking better alternatives to fixed deposits.

Arbitrage Funds

Arbitrage funds earn returns by taking advantage of price differences between the cash market and the derivatives (futures) market. For example, if a stock trades at a slightly higher price in the futures market than in the cash market, the fund manager simultaneously buys in one and sells in the other to lock in a risk-free profit. While the returns are moderate (generally 7–8% annually), the significant advantage is equity-style taxation; long-term capital gains are taxed at just 10% after one year, unlike debt funds, which are taxed according to the income slab. This makes arbitrage mutual fund returns very attractive for investors with low risk appetite.

Liquid & Overnight Funds

These funds are ideal for short-term, low-risk mutual fund investors seeking quick access to their funds.

• Liquid Funds: Invest in short-term instruments (up to 91 days) and usually deliver around 6–7% per annum.
• Overnight Funds: Invest in securities with just one-day maturity, making them one of the safest categories in mutual funds. They are perfect for parking idle cash for a few days or weeks, offering instant liquidity with almost negligible risk.

Hybrid / Equity Savings Funds

Hybrid or equity savings funds combine equity, debt, and arbitrage strategies in a single portfolio. This mix allows investors to enjoy moderate equity-linked growth while still maintaining stability through debt and arbitrage positions. They are well-suited for conservative investors seeking a balance between growth and safety. Typically, these funds provide returns in the range of 8–10% annually, with significantly lower volatility compared to pure equity funds.

Although low-risk mutual funds are generally safer than equity-oriented schemes, it's essential to consider a few key factors before investing in them. These will help you choose the right fund and avoid surprises.

Expense Ratio

The expense ratio is the fee charged by the mutual fund house for managing your investment. Since low-risk funds usually generate moderate returns (6–9% p.a.), a higher expense ratio can eat into your gains. Always compare similar funds and prefer those with a competitive cost structure.

Taxation Rules

• Debt funds: Taxed as per your income tax slab, regardless of holding period (as per 2023 tax rules).
• Arbitrage funds: Treated like equity funds. Gains after 1 year qualify as long-term and are taxed at 10% (above ₹1 lakh).

Understanding taxation ensures you pick the right category depending on your time horizon and tax bracket.

Investment Horizon

Your time frame matters:

• For a few days to a few months: Liquid and overnight funds are the best options.
• For 1–3 years: Low-duration or short-duration debt funds are suitable.
• For 3 years or more: Arbitrage funds or hybrid equity savings funds can strike a balance between safety and slightly higher growth.

Exit Load

Some low-risk mutual funds charge an exit load if you withdraw money within a specific period (e.g., 7 days or 30 days). Before investing, check the exit load structure to avoid unnecessary charges, especially if you may need quick access to your funds.

While low-risk mutual funds are popular among conservative investors, they aren't the only way to grow your money safely. Several safe investment options in India can be compared to mutual funds to determine which one best fits your financial goals.

Fixed Deposits (FDs)

• Pros: Guaranteed returns, simple to understand, and flexible tenures.
• Cons: Interest rates (5–7% p.a.) often fail to beat inflation, and premature withdrawal may attract penalties.
• Comparison: Low-risk mutual funds usually deliver slightly higher returns with better liquidity.

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Public Provident Fund (PPF)

• Pros: Backed by the Government of India, tax-free interest, and EEE (Exempt-Exempt-Exempt) status under Section 80C.
• Cons: 15-year lock-in makes it unsuitable for short-term needs.
• Comparison: Ideal for long-term wealth building, while mutual funds offer better flexibility.

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National Pension System (NPS)

• Pros: Retirement-focused investment with tax benefits under Section 80C and 80CCD(1B).
• Cons: Partial equity exposure may bring mild volatility; withdrawals are restricted till retirement age.
• Comparison: Great for retirement planning, while mutual funds are better for liquidity and short/medium-term goals.

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Bonds (Government & Corporate)

• Pros: Regular fixed income, lower risk if investing in government securities, and suitable for long-term investors.
• Cons: Corporate bonds carry some credit risk, and their returns are typically lower than those of equity-oriented investments.
• Comparison: Debt mutual funds often invest in these bonds, providing diversification and professional management that reduce risk compared to holding individual bonds.

Fixed deposits, PPF, NPS, and bonds remain trusted safe investment options in India. Still, low-risk mutual funds combine the best of both worlds: safety plus flexibility, making them an excellent choice for short-term and conservative investors.

Low-risk mutual funds are designed to protect capital, but with the right approach, you can still optimize your returns. Here are some expert strategies:

SIP vs. Lump Sum

• SIP (Systematic Investment Plan): Ideal if you want to build a disciplined habit and spread investments over time. Works well for conservative investors who don't want to commit large amounts at once.
• Lump Sum: More effective for short-term parking of idle funds (like bonuses or emergency cash). Since low-risk funds don't fluctuate much, lump-sum investing is also a safe option for immediate deployment.

Use SIPs for long-term stability and a lump sum for short-term liquidity.

Diversification

Don't put all your money in a single fund. Instead, spread it across categories:

• Debt funds for steady income
• Arbitrage funds for tax-efficient returns
• Liquid/overnight funds for short-term needs

Diversification helps balance risk and ensures consistent returns across various market cycles.

Rebalancing Portfolio

It's necessary to review even minimum-risk funds to make them more efficient in their roles. Markets, interest rates, and tax laws change over time, so you should adapt accordingly:

• If interest rates increase, consider selling some long-term debt securities and replacing them with short-duration debt funds.
• If your goals shift (e.g., from short-term parking to medium-term planning), rebalance by choosing options such as liquid funds, arbitrage funds, or hybrid equity savings.

Regular rebalancing keeps your portfolio aligned with financial goals and prevents unnecessary risks.

By utilizing SIP and lump sum investments strategically, spreading your money across various categories, and rebalancing when necessary, you can maximize the benefits of low-risk mutual funds while maintaining a secure investment.