5 Types of Low-Risk Mutual Funds That Are Worth Investing

Everyone is familiar with the risks that come along with investment in mutual funds. Mutual fund investments are available in a variety of styles, ranging from short-term to long-term, as well as low-risk to high-risk possibilities. 

 

Individual preferences and investing goals will determine whether or not a mutual fund investment is acceptable. 

 

In this article, we will understand the definition of low-risk mutual funds and explore the different types of low-risk mutual funds.

 

 

What are Low-risk Mutual Funds?

 

Low-risk mutual funds, as the name implies, are mutual funds with the fewest risk elements. Because they typically invest in securities such as government infrastructure bonds, energy, real estate, and so on, these funds have a better probability of generating guaranteed returns.

 

Many investors prefer to invest in mutual funds because they provide larger returns and are less taxes than other vehicles such as fixed deposits. Risk-averse investors, on the other hand, are those who want safe profits and cannot accept risk in their investments. A risk-averse investor will avoid stocks since they are high-risk investments.

 

Debt funds are appropriate for risk-averse or even inexperienced investors interested in Mutual Funds. These are safer since they invest in government bonds, money market funds, and other similar investments. Liquid funds, ultra-short-term funds, short-term funds, dynamic bonds, gilts funds, and other debt funds come in a variety of risk levels. Long-term debt funds are dangerous investments, thus investors with a low-risk tolerance should avoid them.

 

What are Debt Funds?

 

A debt fund is a Mutual Fund scheme that invests in fixed income products that offer capital appreciation, such as corporate and government bonds, corporate debt securities, and money market instruments. Fixed Income Funds or Bond Funds are other names for debt funds.

 

Debt funds are great for investors who want a steady stream of income but don't want to take any risks. Debt funds are less riskier than equities funds since they are less volatile. Debt Mutual Funds may be a better alternative if you've been saving in traditional fixed income products like Bank Deposits and are seeking consistent returns with low volatility.

 

 

Types of Debt Funds/ Low-risk funds:

 

1. Liquid Funds:

 

Liquid funds are a sort of debt fund that invests in short-term fixed-interest money market instruments. In a liquid fund's portfolio, underlying securities include Treasury bills, commercial paper, and other underlying assets.

 

Liquid funds have a relatively low-risk profile. Liquid funds are the least dangerous of all debt fund types since they primarily invest in high-quality fixed-income securities with short maturities. As a result, risk-averse investors will like these funds.

 

Features of Liquid Funds:

 

• Investing in liquid funds increases the likelihood of making a profit. When compared to typical savings account interest rates, they pay a higher rate of interest.

 

• Dividend distribution is a tax that applies to dividends that investors may receive from liquid investments. Even after taxes, the dividends generated by liquid fund investors beat savings account returns.

 

• Tax benefits are available to liquid investment investors. Long-term earnings are taxed at a rate of 20%, with indexation included.

 

• Investors have the option of withdrawing funds at any moment. When investors have extra cash on hand, they may choose to invest a significant quantity in liquid funds all at once.

 

2. Ultra-short term Funds:

 

Funds that invest in debt securities with remaining maturities of more than 91 days and often less than one year are known as ultra short-term funds, or Liquid Plus Funds (in some cases they may go up to 1.5 years). 

 

Ultra Short Term Funds are short-term investments that are ideal for investors who are ready to take on a little amount of risk in exchange for great rewards. 

 

Essentially, Ultra Short Funds invest in short-term money market securities and other debt instruments; nevertheless, their average portfolio maturity is slightly higher than that of Liquid Funds.

 

Longer-term bond investments offer less interest-rate protection than ultra-short bond funds. Interest rate rises will have less of an influence on the value of these funds than they would on a medium- or long-term bond fund because of their short maturities. While this strategy offers greater protection against rising interest rates than other money market products, it also comes with a greater risk.

 

Furthermore, unlike certificates of deposit (CDs), an ultra-short bond fund has no additional restrictions than a typical fixed-income fund.

 

 

3. Short Term Funds:

 

Short-term funds are debt funds that lend money to businesses for one to three years. These funds typically invest exclusively in high-quality firms with a track record of timely loan repayment and adequate cash flow from activities to warrant the borrowing.

 

These funds have the following advantages:

 

• Ideal for the money you won't need for at least a year and a half.

• These funds have a superior track record than bank fixed deposits in terms of returns while keeping risk to a minimum.

• If kept for three or more years, they are more tax-efficient than fixed deposits.

 

Short-term funds provide better returns for investments kept for a short period than bank deposits such as savings accounts and fixed deposits. Depending on the assets available in your short-term mutual fund portfolio, the percentage returns vary from 8% to 9%. The overall return on investment is larger than the post-tax profits generated from other investment schemes due to the favorable tax benefits.

 

4. Dynamic Bond Funds:

 

The Dynamic Bond Fund is a debt fund that invests in a variety of debt and money market securities with varying maturities, such as Government Securities, corporate bonds, and so on. The term and maturity of the securities that these funds invest in are unrestricted. The primary purpose of these bonds is to provide the greatest returns in both rising and falling market conditions. It is, however, mostly reliant on the fund manager's decisions and portfolio management.

 

Dynamic bond funds can invest in several different durations. The type of securities in which the fund manager invests, as well as the fund manager's interest rate forecast, influence the duration of a Dynamic Bond.

 

If the fund manager expects future interest rates to be lower, he or she would invest in longer-term (longer-duration) bonds to profit from price gains. If the fund manager believes interest rates will climb in the future, he or she will invest in shorter-term bonds to reduce interest rate risk and reinvest bond maturity proceeds at higher rates.

 

5. Gilt Fund:

 

Gilt funds are debt funds that primarily invest in assets held by the federal and state governments. These securities are issued when the government needs funds to fund a certain project. These securities differ in terms of interest or coupon rate, as well as maturity period. Because government assets are seen as a safe investment, gilt funds are an excellent option for risk-averse investors.

 

Gilt Funds are divided into two categories:

 

• The first is a fund that primarily invests in government bonds of varying maturities.

• The second type has a ten-year continuous maturity, but investors must put at least 80% of their money into ten-year government securities.

 

The features of Gilt Funds are:

 

• Because they do not bear credit risk, gilt funds, unlike corporate bond funds, are the most flexible investments. It's a form of liquid investment.

 

• Gilt funds have the potential to earn up to 12% in returns (according to clear tax). Returns on gilt funds, on the other hand, are not guaranteed and are highly volatile in reaction to interest rate swings.

 

• The expense ratio of gilt funds is an annual fee that covers the fund manager's fee as well as other costs. This is calculated as a proportion of the fund's average AUM.

 

• The capital gains from the gilt fund are taxed. The tax rate is based on how long the investor has been invested in the fund.

 

 

BottomLine: Who should invest in Low-risk Mutual Funds?

 

Low-risk mutual funds are favored by novice investors who are unfamiliar with the markets and want to take appropriate safeguards to minimize investing dangers. Depending on the fund and investment time horizon, an investor with a low-risk appetite can pick a low-risk fund and receive greater returns than bank FDs.

 

Low-risk funds are great for investors looking for big returns in a short period since they are extremely liquid and have maturities ranging from 91 days to one year. Low-risk mutual funds can also provide a tax benefit to investors, especially if they are seeking alternatives to bank FDs.