Safest and Best Low-Risk Mutual Funds for First-Time Investors

For new investors, choosing mutual funds can feel overwhelming, especially when balancing the desire for returns with the need for safety. Low-risk mutual funds, particularly debt funds, overnight funds, and arbitrage funds, are excellent choices for beginners because they prioritize capital preservation while still aiming for moderate returns. 

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Below are some of the best-performing low-risk mutual funds (in the Indian market) and key strategies to invest safely and wisely.r

Why Consider Low-Risk Mutual Funds as a Beginner

  • Stability and Predictability: Compared to equity funds, low-risk funds are less volatile, making them suitable for short- to medium-term goals.
  • Better Than Fixed Deposits: Many debt funds and arbitrage funds beat fixed deposit (FD) rates while offering comparable safety.
  • Tax Efficiency: Especially for arbitrage funds, the tax treatment can be favorable when held over certain durations.
  • Liquidity: Debt funds, overnight funds, and low-duration funds usually offer decent liquidity, making them good for parking funds in an emergency or while deciding on long-term investments.
     

Top Low-Risk Mutual Funds to Consider (2025)

Based on recent performance and risk profiles, here are some low-risk mutual funds worth exploring for beginners:

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1. Invesco India Arbitrage Fund

  • Category: Arbitrage (hybrid) — low risk.
  • Returns: ~7.1% (1-yr), ~7.9% (3-yr) per Groww data.
  • Why It’s Good: Locks in price differences between cash and futures markets, offering stable returns with minimal market-direction risk.

2. Kotak Arbitrage Fund

  • Category: Hybrid Arbitrage.
  • Returns: ~7.0% (1-yr), ~7.9% (3-yr).
  • Why It’s Good: Strong track record, relatively low expense ratio; suitable for conservative SIP investors.
     

3. Tata Arbitrage Fund

  • Risk: Low.
  • Performance: 3-year returns around ~7.9% per Groww.
  • Advantage: Trusted brand, consistent strategy, and good historical returns making it beginner-friendly.
     
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4. Axis Overnight Fund

  • Category: Debt (Overnight).
  • Performance: ~6.0% (1-yr), ~6.5% (3-yr) as reported by Groww.
  • Why It’s Safe: Very short-term instruments mean low interest rate risk; useful to park money temporarily.
     

5. Bank of India Overnight Fund

  • Low risk debt fund.
  • Returns: ~6.1% (1-yr), ~6.5% (3-yr) per Groww.
  • Benefit: Backed by a PSU (Bank of India), which may add an element of trust for risk-averse investors.
     

6. ICICI Prudential Savings Fund (Low Duration)

  • Category: Low-duration debt. Recommended by expert guides.
  • Why It Helps: Good for medium-term goals — offers better return than savings bank but less volatility than long-term debt.
     
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7. LIC MF Low Duration Fund

  • According to Groww, 3-year annualized returns are ~7.59%.
  • Why It’s Beginner-Friendly: Shorter maturity instruments reduce risk, and LIC's reputation adds credibility.
     

Key Risks to Be Aware Of

  • Even low-risk mutual funds are not risk-free. Here are important risks to keep in mind:
  • Interest Rate Risk: When interest rates rise, bond and debt fund NAVs can fall.
  • Credit Risk: Debt funds may invest in bonds of companies; if those companies default, investors can suffer.
  • iquidity Risk: Some funds may take time to exit or may not be very liquid in stressed markets.
  • Tax Risk: Depending on the type of fund (arbitrage, debt), the tax treatment varies; it’s important to understand how long to hold.
  • Inflation Risk: Low-risk mutual funds usually offer moderate returns that may not significantly outpace inflation over long periods.
     

Smart Strategies for Beginners

  • Start with a SIP (Systematic Investment Plan): Invest small amounts regularly to smooth out volatility and build discipline.
  • Match Time Horizon with Fund Type:
  • ≤ 1 year: Overnight or ultra-short funds
  • 1–3 years: Low-duration or short-duration debt funds
  • 3+ years: Arbitrage funds or conservative hybrid funds
  • Diversify: Don’t put all your money in one fund. Spread across a few low-risk funds to balance risk and liquidity.
  • Monitor Expense Ratios: Choose funds with reasonable expense ratios — high costs eat into your safe returns.
  • Review Periodically: Reassess your fund choice every 6–12 months, especially if your goals or risk appetite change.
     
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Should You Include Equity at All?

Even for beginners focused on low-risk funds, consider setting aside a small portion (10–20%) of your portfolio for equity or hybrid funds once you are comfortable. This can help you benefit from long-term growth while keeping the bulk of your investments in safer instruments.

Final Thoughts

Low-risk mutual funds are a great way for beginners to enter the world of investing. They provide a safer alternative to equity funds while often outperforming traditional fixed deposits. By choosing well-managed arbitrage, overnight, or low-duration debt funds, and investing through a disciplined SIP, new investors can create a reliable, low-volatility portfolio that grows steadily without excessive risk.