What are Low-risk mutual funds?

By the time Mayank turned 50, he had accomplished most of his financial goals, both short and long-term, including the purchase of a car and house, creating a corpus for his daughter’s education and travelling to the Seven Wonders of the World. With retirement now clearly on the horizon, Mayank knew it was time to refocus on his final major financial goal – creating a retirement fund sizeable enough to enjoy his current lifestyle for a couple of decades post superannuation. While he had already started systematic investment plans for his retirement fund several years ago, now was the time to move some of his invested corpus into low-risk mutual funds, given the comparatively shorter time horizon of five years.

Investing in mutual funds has long been a popular choice for individuals seeking to grow their wealth. While mutual funds come in various flavours, such as equity fund, debt funds and hybrid funds, some investors prefer a more conservative approach, focusing on low-risk high return mutual funds. The best low risk mutual funds offer a way to generate returns without exposing your investments to significant market volatility, something that an investor like Mayank would greatly prefer in his situation.

Best Low-risk Mutual Funds

When seeking a low risk or no risk mutual fund, investors often prioritise stability and the preservation of capital. These can come in a variety of forms, such as debt mutual funds which primarily invest in fixed-income securities like government bonds, corporate bonds, and money market instruments and have less volatile than equity funds, hybrid funds or balanced funds which maintain a mix of both equity and debt instruments in their portfolios and liquid funds which invest in short-term money market instruments, providing high liquidity and safety. In hybrid funds, the equity component offers growth potential, while the debt component provides stability and these schemes come in various configurations, allowing investors to choose their preferred risk level. Fixed maturity plans, which are close-ended debt funds with a fixed tenure, investing in instruments aligning with their maturity timeline and thereby providing predictable returns and reduced interest rate risk, also fall under the low-risk mutual fund category.

Types of Mutual Funds

All types of mutual funds can have a low-risk variant, as long as you focus on the right asset allocation. For instance, equity funds which invest in large cap stocks are known to be comparatively low risk, while debt funds investing in lower-rated corporate bonds can involve a high-risk quotient. The types of mutual funds you should know are –

• Equity Funds: While not typically considered low-risk, certain equity funds, such as large-cap funds, have a more stable investment profile. Large-cap stocks often belong to established companies with a history of consistent performance, reducing the fund's exposure to market volatility.
• Debt Funds: As mentioned earlier, debt funds invest primarily in fixed-income securities, offering lower risk compared to equities. Within this category, you can find options like ultra-short-term funds, which have minimal interest rate risk.
• Hybrid Funds: Hybrid funds combine equity and debt components to achieve a balance between growth potential and stability. The allocation to each asset class can vary, allowing investors to choose a risk level that suits their preferences.
• Systematic Investment Plan (SIP): SIP is an investment strategy rather than a distinct type of fund and it enables you to invest a fixed amount regularly in a mutual fund of your choice. While SIPs can be used for various funds, a low-risk high return SIP can offer you consistent, long-term growth.
• ELSS Mutual Funds: Equity-Linked Savings Schemes (ELSS) are tax-saving mutual funds that predominantly invest in equities. While they involve some risk, low risk ELSS mutual funds have a lock-in period and offer potential tax benefits, making them a popular choice among investors seeking tax efficiency.

Investing in Low-risk Mutual Funds

Here is a simple, step-by-step approach to investing in low-risk mutual funds –

Step 1: Set clear financial goals: Before investing, identify your financial goals, whether it is building an emergency fund, saving for a home, or planning for retirement. Also understand your risk tolerance, which reflects your willingness and ability to endure fluctuations in your investment's value.

Step 2: Research and select funds: Research different low-risk mutual funds within your preferred category, such as debt funds, liquid funds, or hybrid funds, with a focus on funds with a track record of stable returns and low volatility. Remember to diversify.

Step 3: Open an investment account: To invest in mutual funds, you will need to open an investment account with a reputable fund house or a financial institution. Most fund houses offer online platforms for easy account setup. If you opt for SIPs, set up automatic contributions to your chosen low-risk mutual funds as regular, disciplined investing can help you achieve your financial goals over time.

Through this simple and convenient process, you can invest in low-risk mutual funds and realise your financial goals, just like Mayank did. So start right away!

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