Low-Risk Mutual Funds In India: Smart Investing Without The Stress

Marketing and promotional campaigns of mutual funds in India often come up with common disclaimers. The disclaimers mention how these funds are subject to market risks and how critical it is to read the offer document carefully. The disclaimers are not wrong. When seeking an extra return on your investment, it is crucial to be prepared to assume a similar level of risk.

Besides this, it is also important to understand that mutual funds, though certified as passive investments, might need your involvement at different stages, especially when you wish to make the most out of your investments. However, there is a category of low-risk mutual funds in India that gives you the option of smart investing while not increasing your risk levels and without all the stress. Let's explore the best low-risk mutual funds in India.

What Qualifies As A Low-Risk Mutual Fund?

Now, you might wonder what low-risk mutual funds are and what their characteristics are. You might wonder if they offer lower returns compared to typical mutual funds and the types of underlying assets these funds invest in. 

Well, low-risk mutual funds generally refer to different schemes that focus primarily on capital preservation rather than aggressive growth. These funds invest in safer instruments like government securities, treasury bills, and highly rated corporate debt. All these underlying assets focus on minimising volatility and default risk of the funds. 

The question here is why one would invest in such funds when there is no certainty of receiving high returns. These might not provide the flashiest returns, but they are critical for the stability of your portfolio, which can be quite handy in a rather volatile market. 

Debt Funds, Liquid Funds, Overnight Funds

Here are the most common categories of low-risk mutual funds that you can find in India:

Debt funds invest primarily in fixed-income instruments such as government bonds, commercial papers, and certificates of deposit.

Liquid funds are short-term debt instruments with maturities up to 91 days, often used by investors to park idle funds while still earning better returns than a savings account. Liquid mutual fund returns are usually quite low. 

Overnight funds, as the name suggests, invest in securities with a one-day maturity, making them the lowest-risk instruments among mutual funds.

Credit Ratings And Maturity

One of the main indicators of a safe mutual fund investment is the credit quality of the instruments in the fund’s portfolio. Fund managers rely on ratings assigned by agencies like CRISIL or ICRA, with AAA-rated instruments indicating the least default risk.

Maturity duration also plays a role in how “safe” a fund is perceived. Funds with shorter maturity periods are less sensitive to interest rate movements, thereby reducing volatility, which is a key factor in building a conservative investment strategy.

Best Low-Risk Mutual Funds In 2025

We have compiled a list of the best mutual funds to invest in low risk that you can include in your investment portfolio, which can not only enhance your stable returns but can also be critical in giving diversification benefits to your investment. 

Here is the criteria we had for choosing the funds:

1. Credit Quality of Underlying Securities (prefer high ratings by credit agencies or government-backed instruments)
2. Portfolio Maturity Duration (shorter durations reduce interest rate sensitivity)
3. Historical Returns (especially consistency across 1Y/3Y periods)
4. Expense Ratio (lower fees improve net returns)
5. Exit Load and Liquidity (important for short-term investors)

Top 3 Funds Under INR 5,000

Are Low-Risk Funds Really “Risk-Free”?

Technically, these funds assume a lower level of risk, especially when compared with other equity-based mutual funds that invest in small or mid-cap shares. However, even the safest mutual fund carries a certain degree of market exposure, and hence it cannot be deemed risk-free at any point. There might be NAV fluctuations, and investors still need to take care of taxation and exit loads on their own. 

NAV Fluctuations Explained

NAV fluctuation in debt funds primarily occurs due to changes in interest rates. For instance, if interest rates rise, the value of existing lower-yielding bonds falls, causing the NAV to drop. Similarly, longer-duration funds are more sensitive to these shifts. 

So while short-duration, liquid, or overnight funds typically see minimal fluctuations, dynamic bond funds may reflect more noticeable swings. Understanding this dynamic is crucial for setting realistic expectations.

Taxation and Exit Load

This is a common misconception that debt or low-risk mutual funds do not carry capital gain taxes, but it is far from the truth. Here are some of the taxation-related factors:

1. For debt mutual funds, capital gains (irrespective of holding period) are added to your income and taxed as per your slab.
2. There’s no indexation benefit post-April 2023, unlike before.
3. Some funds may have exit loads (typically if withdrawn within 7 days to 1 month), especially liquid or arbitrage funds.

 Also Read: https://www.gripinvest.in/blog/hybrid-mutual-funds-taxation

Conclusion

Low-risk mutual funds offer a calm harbour in the often turbulent sea of investing. For those who prioritise capital preservation over aggressive growth, these funds serve as ideal tools for building steady, low-volatility portfolios. Whether you're testing the waters as a new investor or simply parking idle cash, options like arbitrage funds, dynamic bonds, and liquid schemes offer dependable returns with reduced anxiety.

Just remember: “low risk” isn’t “no risk.” Factors such as interest rate movements, credit quality, and mutual fund taxation in India continue to influence the market. But with careful selection, like the GripInvest-curated funds we covered, you can adopt a smart, conservative investment strategy without sacrificing peace of mind.

FAQs On Low-Risk Mutual Funds

1. How do liquid and overnight funds differ?

Liquid funds invest in debt instruments with maturities up to 91 days, offering slightly higher returns with low risk. Overnight funds, on the other hand, invest in one-day maturity instruments, making them the lowest risk category with minimal NAV fluctuation.

2. Can I start investing in low-risk funds with just INR 5000?

Yes. Many low-risk mutual funds allow investments with as little as INR 1,000–INR 5,000. In fact, all the funds mentioned in this blog are available under INR 5,000 through platforms like GripInvest.

3. What returns can I expect from low-risk mutual funds in 2025?

Returns typically range between 6% and 8.5% annually, depending on the fund type. Arbitrage and dynamic bond funds may deliver slightly higher returns than liquid or overnight funds, with moderate risk.

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Disclaimer - Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading.
This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for consequences of any actions taken based on the information provided. For more details, please visit www.gripinvest.in
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