Best Low Risk Mutual Funds in India 2026: Top Safe Investment Options And Returns
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.
Fund Category Breakdown
Here are the most common categories of low-risk mutual funds that you can find in India:
1. Overnight Funds
Overnight funds sit at the shortest end of the mutual fund risk spectrum. They invest in securities that mature in one day, so investors usually use them for brief cash parking rather than long-term wealth creation. SBI Overnight Fund, HDFC Overnight Fund and ICICI Prudential Overnight Fund are some examples in this category.
2. Liquid Funds
Liquid funds invest in debt and money market securities with maturity of up to 91 days. They may suit investors who want to keep emergency money or short-term surplus in a low-volatility option. For example, ICICI Prudential Liquid Fund, Nippon India Liquid Fund and SBI Liquid Fund fall in this segment.
3. Ultra Short-Term Funds
Ultra short-term funds move slightly beyond liquid funds in terms of duration. They invest in debt and money market instruments where the portfolio’s Macaulay duration is generally between three and six months. Axis Ultra Short Duration Fund, Nippon India Ultra Short Duration Fund and HDFC Ultra Short Term Fund are examples here.
4. Arbitrage Funds
Arbitrage funds use price differences between the cash and derivatives market. They are not debt funds, but many cautious investors consider them for relatively lower-risk allocation because the strategy does not depend fully on market direction. Kotak Arbitrage Fund, Tata Arbitrage Fund and SBI Arbitrage Opportunities Fund are examples.
5. Conservative Hybrid Funds
Conservative hybrid funds mainly invest in debt, with a limited equity portion. The usual structure is 75% to 90% in debt instruments and 10% to 25% in equity and equity-related instruments. This gives investors some growth exposure without taking a full equity-fund risk profile. ICICI Prudential Regular Savings Fund, SBI Conservative Hybrid Fund and HDFC Hybrid Debt Fund are examples.
Source: AMFI India1
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 2026
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:
- Credit Quality of Underlying Securities (prefer high ratings by credit agencies or government-backed instruments)
- Portfolio Maturity Duration (shorter durations reduce interest rate sensitivity)
- Historical Returns (especially consistency across 1Y/3Y periods)
- Expense Ratio (lower fees improve net returns)
- Exit Load and Liquidity (important for short-term investors)
This list is based on annualised returns for a monthly SIP of INR 10,000 over 5 years as of April 2026. The funds are sorted by returns under the low risk category.
| Fund Name | Type | 5 Year SIP Return p.a. | AUM | Expense Ratio |
| Kotak Arbitrage Fund | Hybrid Arbitrage | 6.66% | INR 67,117 crore | 1.05% |
| Bank of India Liquid Fund | Debt Liquid | 6.66% | INR 1,611 crore | 0.08% |
| Invesco India Arbitrage Fund | Hybrid Arbitrage | 6.65% | INR 26,370 crore | 1.06% |
Source: ET Money, as of April 20262
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 on Low Risk Mutual Funds
Pre-tax returns can mislead. A liquid fund may look steady, but slab based taxation can reduce the net figure. An arbitrage fund may show mild movement in returns, yet its equity style treatment can work better after one year. This becomes relevant for investors in the 20% or 30% slab.
The choice should not depend only on the return shown. Let’s understand the taxation before you make the choice:
1. Arbitrage funds may get equity-style taxation
Arbitrage funds are often treated as equity-oriented funds if they meet the required equity exposure. This is why they stand apart from liquid and other debt-oriented funds.
For arbitrage funds
STCG applies if units are sold within 12 months. The tax rate is 20%.
LTCG applies if units are sold after 12 months. The tax rate is 12.5% on gains above INR 1.25 lakh in a financial year.
This can make arbitrage funds more tax-efficient for investors in higher tax slabs. However, the return still depends on arbitrage spreads and market conditions.
2. Liquid and debt funds are usually taxed at slab rate
Liquid funds, overnight funds and ultra short duration funds generally fall closer to the debt fund tax bucket. For many such units bought on or after Apr 1, 2023, gains are taxed as per the investor’s income tax slab.
This means a 30% slab investor may see a sharper reduction in post tax return than someone in a lower slab. The earlier indexation benefit is also not available for many newer debt fund investments.
3. Conservative hybrid funds need a closer check
Conservative hybrid funds mainly invest in debt, with a smaller equity portion. Because of this structure, they may not automatically qualify for equity style taxation.
Investors should check the scheme’s asset allocation before assuming any tax advantage. A fund with higher debt exposure may follow debt fund taxation.
Low Risk Mutual Funds vs FD vs Savings Account
| Factor | Savings Account | Fixed Deposit | Low Risk Mutual Funds |
| Meaning | A bank account used for routine cash access, payments and withdrawals. | A term deposit is placed with a bank for a selected period. | A set of relatively stable mutual fund options, such as overnight, liquid, ultra short duration, arbitrage, and conservative hybrid schemes. |
| Return clarity | Earnings are usually modest. Banks may revise savings rates within RBI rules. | The rate is known at the time of booking. This gives better visibility on the maturity value. | No assured payout. Performance depends on the scheme type, rate cycle, portfolio quality and market spreads. |
| Risk | Suitable for day-to-day banking. The main concern is low real earnings after inflation and tax. | Generally steady, though bank strength, tenure and early closure rules still matter. | Lower in volatility than equity funds, but not free from risk. Debt schemes may face credit or interest rate pressure. Arbitrage schemes rely on market price gaps. |
| Liquidity | Very easy access. Cash can usually be withdrawn at short notice. | Partial flexibility. Premature closure is usually allowed, but the bank may reduce the final payout. | Exit ease varies. Overnight and liquid options are more accessible. Conservative hybrid schemes usually need a longer holding period. |
| Tax | Savings interest is added to income and taxed as per slab. Eligible taxpayers may claim the Section 80TTA deduction of up to INR 10,000 under the old tax regime. | FD earnings are taxed as per slab. Section 80TTA does not cover them. Resident senior citizens may use Section 80TTB under the old tax regime. | Treatment depends on the scheme. Many debt-oriented funds bought on or after Apr 1, 2023, are taxed as short-term capital gains. Arbitrage schemes may follow equity rules if they qualify. |
| Post tax view | Best for access rather than income. The final gain may remain small after deductions and inflation. | Predictable before taxation. The effective yield can shrink for people in higher slabs. | Useful for parking surplus beyond bank products. The outcome depends on holding period, scheme design, and tax bracket. |
| Best fit | Emergency cash, monthly spending, and balances needed quickly. | People who prefer a known rate and a clear maturity date. | Those who can accept small value movements for flexibility, liquidity or category-specific tax treatment. |
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.
References:
1. AMFI India, accessed from: https://www.amfiindia.com/investor/knowledge-center-info?zoneName=CategorizationOfMutualFundSchemes&ref=finshots.in
2. ET Money, accessed from: https://www.etmoney.com/mutual-funds/featured/best-low-risk-mutual-funds/21
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Author: Grip Invest Editorial Team The Grip Invest Editorial Team is a group of Chartered Accountants, MBA (Finance) graduates, and Qualified Research Analysts dedicated to helping you invest smarter. We dive deep into India's fixed income landscape to deliver content that is accurate, up-to-date, and easy to understand. Whether you're exploring bonds, fixed deposits, or other fixed income opportunities, our guides cut through the noise and give you the clarity to make better financial decisions. |
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