5 Best Low-Risk Mutual Funds to Invest in 2023

Are you looking to invest in the best low-risk mutual fund schemes in 2023 and beyond? Yes, then this piece of content is for you.

Certain sub-categories of debt mutual funds may expose you to low risk and are well-suited to invest for the short term.

Investing in debt funds in the current environment

You may be aware that the RBI has missed its inflation target for three consecutive quarters in 2022 despite raising policy rates by 190 basis points (bps) in the current cycle of monetary tightening.

With the upward risk to the headline inflation trajectory arising on supply chain issues, the six-member Monetary Policy Committee of the RBI remains focused on the withdrawal of accommodation stance to ensure that inflation is controlled within the target going forward while supporting growth.

In other words, we could expect the policy repo rate to move up further. And in this regard, the RBI would look to the west, i.e., to the U.S. Federal Reserve, the European Central Bank (ECB), and the Bank of England (BOE), who all recently raised their policy interest rates again by 75 bps. In the December 2022 bi-monthly meeting I anticipate RBI raising rates by around 35-50 bps.

So far, with rate hikes, the yield on 10-year G-sec yield has hardened on a year-to-date basis. The World Bank and the International Monetary Fund (IMF) are of the view that synchronised rate hikes by central banks (to tame inflation) could push the global economy into a recession in 2023, and a string of financial crises may crop up in emerging markets and developing economies, which would do them lasting harm. This may push the yields further.

In such a scenario it is natural to look for low-risk debt funds to invest in. But do not that the longer-duration debt funds are likely to be less lucrative and more sensitive to interest rates, at least for the time being. Ideally, you will be better off deploying your hard-earned money at the shorter end of the maturity curve. This is because, usually, debt securities with shorter maturity papers are less exposed to interest rate and default risk (compared to the longer maturity ones).

So, typically consider investing in Overnight Funds, Liquid Funds, and Ultra-Short Duration Funds with worthy portfolio characteristics when your investment horizon is up to a year.

And if you have a slightly longer investment horizon, of say 2 to 3 years, and do not mind taking slightly more interest rate risk, then Banking & PSU Debt Funds and Corporate Bond Funds with worthy portfolio characteristics may be considered. Let's understand the trait of these low-risk debt funds in a little more detail...

Overnight Funds -- These are open-ended debt funds investing in overnight instruments having a maturity of a day. They are typically money market instruments, viz. Treasury bill (T-Bills). To park money for the very short term, say from day to week or so, you may consider an overnight fund as a substitute for holding money in a savings bank account.

Liquid Funds -- These are open-ended debt funds investing in debt and money market instruments with maturities of up to 91-days only. They mainly invest in liquid assets such as T-Bills, Repos on G-secs, call money, and other money market instruments such as Certificate of Deposits (CDs) and Commercial Papers (CPs).

In recent years, the capital market regulator has introduced some additional norms for Liquid Funds to enhance safety. They are mandated to invest at least 20% of their assets in T-Bills, Repos on G-secs, and call money, among other instruments being true to their label. Liquid Funds are subject to exit loads for redemptions within the first seven days, and hence are suitable to investors having a time horizon ranging from a few weeks to around 3-6 months.

Ultra-Short Duration Funds -- These open-ended debt funds come next to liquid funds in terms of risk-return potential and invest in relatively higher-maturity debt papers and money market instruments. As per the regulatory guidelines, the Ultra-Short Duration Funds are mandated to invest in debt & money market instruments such that the Macaulay Duration (MD) of the portfolio is between 3 to 6 months. The Macaulay Duration (named after Frederick Macaulay) is the weighted average term-to-maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price.

Given the above maturity requirements, Ultra-Short Duration Funds invest in a range of credit instruments such as Certificates of Deposits (CDs), Commercial Papers, G-secs and money market instruments amongst others. But as the duration is slightly higher, the risk is slightly more as well compared to a Liquid Fund. Therefore, you need to keep an investment time horizon of around 6-8 months when considering Ultra-Short Duration Funds.

Banking and PSU Funds -- These are open-ended funds that are mandated to invest at least 80% of their assets in debt instruments issued by PSUs, banks and public financial institutions. The portfolios of Banking and PSU Funds mainly comprise of government and quasi-government securities, along with some exposure to top names in the banking industry. These companies enjoy high-credit ratings (AAA or equivalent) and government backing, which makes them highly liquid and less prone to credit risk. These funds usually invest in debt securities that mature over the short to medium term with some allocation to longer-term maturity papers. Given the interest risk involved, these funds are suitable if you have an investment horizon of around 2-3 years and are ready for slightly more risk.

Corporate Bond Funds -- They are open-ended debt funds as per regulatory guidelines are mandated to invest at least 80% of their assets only in the highest-rated corporate bonds, i.e., AA+ and above. The kind duration the fund will hold is not specifically defined. But the average maturity profile of most Corporate Bond Funds ranges between 1 to 3 years. Thus, they are moderately sensitive to interest rates and suitable only if you have an investment horizon of around 3 years.

Always remember that although debt funds are relatively less risky than equity funds, they aren't 100% safe. There have been instances in the past where even the safest categories have incurred heavy losses due to negative credit surprises. To lower the impact of negative credit events on investors, the capital market regulator has been consistently rationalising the policy framework applicable to debt funds.

For instance, the regulator has capped the sector exposure limit at 20%. Moreover, group companies of the sponsor as well as AMC can be up to 15% subject to prior approval of the Board of Trustees for exposure above 10%.

Similarly, the regulator now mandates open-ended debt schemes other than Overnight Funds, Liquid Funds, Gilt Funds, and Gilt Funds with 10-year constant duration to hold a minimum of 10% of their net assets in liquid assets, which include cash, G-secs, T-Bills and Repos on G-secs.

5 Best Low-Risk Mutual Funds to Invest in 2023
(Image source: freepik.com)

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Now that you are well aware of the suitable sub-categories, here are the five best low-risk mutual funds you may consider...


Table 1: Performance of 5 best low-risk mutual funds

Scheme Name Returns (Absolute%) Returns (CAGR%) Risk-Ratios
1 Month 3 Months 6 Months 1 Year 3 Years 5 Years Std. Dev. Sharpe Sortino
Axis Overnight Fund 0.51 1.41 2.56 4.33 3.73 0.02 0.74 0.45
Quantum Liquid Fund 0.48 1.36 2.51 4.23 3.77 4.82 0.02 0.68 0.46
ICICI Pru Ultra Short-Term Fund 0.44 1.33 2.59 4.62 5.63 6.68 0.12 0.41 0.60
Aditya Birla SL Corp Bond Fund 0.46 1.19 2.64 3.65 6.69 7.23 0.68 0.09 0.21
IDFC Banking & PSU Debt Fund 0.38 1.14 2.09 3.44 6.14 7.35 0.71 0.04 0.07
Category Average-Liquid Fund 0.48 1.38 2.54 4.30 4.05 5.21 0.03 0.62 0.57
Category Average-Overnight Fund 0.51 1.40 2.54 4.29 3.70 4.59 0.02 0.95 0.56
Category Average-Ultra-Short Duration Fund 0.44 1.29 2.45 4.31 4.84 5.64 0.11 0.33 0.51
Category Average-Corporate Bond Fund 0.35 0.73 2.35 2.68 6.00 6.67 0.79 -0.23 -0.35
Category Average-Banking and PSU Fund 0.38 0.89 2.54 3.13 5.87 6.77 0.70 -0.16 -0.26
Crisil Liquid Fund Index 0.51 1.47 2.69 4.62 4.37 5.52 0.03 0.87 0.71
Nifty 1D Rate Index 0.51 1.41 2.57 4.35 3.76 - 0.02 0.80 0.48
Crisil Composite Bond Fund Index 0.16 0.53 2.64 1.28 5.65 6.36 0.99 -0.03 -0.06
Crisil 10 Yr Gilt Index -0.05 -0.68 2.68 -1.27 3.15 4.56 1.09 -0.21 -0.41
Performance as of 4th November 2022. Returns are Point to Point and in %, calculated using the Direct Plan-Growth option
Past performance is not an indicator of future returns.
In the case of Liquid Funds, Overnight Funds, and Ultra-Short Term Duration Funds, the risk-free rate is considered as 3% p.a., while for Banking & PSU Debt Funds @6% p.a.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT recommendations as such. Speak to your investment advisor for further assistance before investing.
Disclaimer: Quantum Liquid Fund is a scheme from Quantum Mutual Fund, a group company of Quantum Information Services Pvt. Ltd. PersonalFN is not in receipt of any commission directly or indirectly for suggesting the scheme.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.

#1: Axis Overnight Fund

Launched in March 2019, Axis Overnight Fund aims to generate reasonable returns commensurate with very low-interest rate risk and provide a high level of liquidity through investments made primarily in overnight securities having maturity/residual maturity of 1 business day.

Table 2: Top-10 holdings of Axis Overnight Fund

Debt instrument % of assets
Clearing Corporation Of India Ltd. 98.54
91 Days Treasury Bill - 03-Nov-2022 1.52
Net Current Asset -0.06
Data as of 31st October 2022
(Source: ACE MF, PersonalFN Research)

Since the fund invests largely in G-secs and overnight instruments, the portfolio quality of Axis Overnight Fund is top-notch.

As of 31st October 2022, cash and cash equivalent assets accounted for 98.48% of the fund's portfolio, while it held the remaining 1.52% of its assets in sovereign debt.

#2: Quantum Liquid Fund

Launched in April 2007, Quantum Liquid Fund aims to provide optimal returns with low to moderate levels of risk and high liquidity through judicious investments in the money market and debt instruments.

Historically, Quantum Liquid Fund has adopted an ultra-cautious approach for its portfolio and has never chased yields for additional returns, thereby making it truly a low-risk liquid fund.

Table 3: Top-10 holdings of Quantum Liquid Fund

Debt instrument % of assets
91 Days Treasury Bill - 08-Dec-2022 13.75
91 Days Treasury Bill - 19-Jan-2023 13.65
91 Days Treasury Bill - 05-Jan-2023 9.12
Canara Bank (05-Jan-23) 9.12
Tri-Party Repo (TREPS) 9.00
91 Days Treasury Bill - 17-Nov-2022 8.81
National Bank For Agriculture & Rural Development SR-20 H 06.70% (11-Nov-22) 6.46
Housing & Urban Development Corporation Ltd. SR-E 2019 06.99% (11-Nov-22) 4.61
91 Days Treasury Bill - 24-Nov-2022 4.60
Indian Oil Corporation Ltd. -73D (24-Nov-22) 4.59
Data as of 31st October 2022
(Source: ACE MF, PersonalFN Research)

As of 31st October 2022, the fund held a compact portfolio comprising 13 debt securities and cash and cash-equivalent assets. Top-10 holdings accounted for 83.72% of the fund's portfolio.

The weightage of 'AAA and equivalents' are to the tune of 35.73% in the fund's portfolio, besides its 54.48% exposure to sovereign debt, which reflects its penchant for high-credit quality. CDs, CPs, and corporate debt accounted for 13.66%, 9.15% and 12.92%, respectively, while the fund holds around 10.0% in cash and- cash equivalent assets.

#3: ICICI Pru Ultra Short-Term Fund

Launched in May 2011, ICICI Prudential Ultra-Short Term Fund aims to generate income through investments in a range of debt and money market instruments.

Although the fund hasn't excessively churned its portfolio historically or chased higher yields, it does take opportunistic calls by investing a small portion of its assets in 'A and equivalent Assets'.

Table 4: Top-10 holdings of ICICI Prudential Short-Term Fund

Debt instrument % of assets
182 Days Treasury Bill - 24-Nov-2022 7.22
National Bank For Agriculture & Rural Development Sr- SR 21 I 5.00% (11-Mar-2024) 4.89
182 Days Treasury Bill - 01-Dec-2022 3.84
Canara Bank (10-Mar-23) 3.76
National Bank For Agriculture & Rural Development SR-19 F 8.50% (31-Jan-23) 3.65
Housing Development Finance Corporation Ltd. -SR-W-009 06.99% (13-Feb-23) 3.59
Canara Bank (14-Mar-23) 2.93
HDFC Bank Ltd. (12-Sep-23) 2.82
Housing Development Finance Corporation Ltd. -SR-Y-006 05.30% (08-Mar-23) 2.64
Housing Development Finance Corporation Ltd. -SR-W-005 07.21% (30-Dec-22) 2.14
Data as of 31st October 2022
(Source: ACE MF, PersonalFN Research)

As of 31st October 2022, the fund held a portfolio of 86 high-quality debt instruments with short and ultra-short maturities. The fund held 68.08% of its assets in 'AAA and equivalent' instruments, while 'AA and equivalents' and 'A and equivalents' constituted 15.67% and 0.99%, respectively.

Top-10 holdings accounted for 37.48% of the portfolio. The fund's exposure to CDs, CPs and corporate debt was 21.09%, 19.33% and 44.32%, respectively. It held 12.18% exposure to G-secs, while the remaining were cash-and-cash equivalent assets.

#4: Aditya Birla Sun Life Corporate Bond Fund

Launched in March 1997, Aditya Birla Sun Life Corporate Bond Fund is one of the longest-running debt funds in India. The fund aims to generate optimal returns with high liquidity through active management of the portfolio by investing in high-quality debt and money market instruments.

The fund has consistently stuck to its investment objective and credit quality preferences so far.

Table 5: Top-10 holdings of Aditya Birla Sun Life Corporate Bond Fund

Debt instrument % of assets
GOI - 30-Oct-2034 4.11
Sikka Ports & Terminals Ltd. -SR-PPD-11 7.20% (16-Jun-23) 2.89
Bajaj Housing Finance Ltd. - 05.84% (21-Feb-24) 2.73
Sikka Ports & Terminals Ltd. 8.45% (12-Jun-23) 2.59
Axis Bank Ltd. (28-Feb-23) 2.33
Net Current Asset 2.26
07.27% GOI - 08-Apr-2026 2.00
Sikka Ports & Terminals Ltd. 6.75% (22-Apr-26) 1.92
Power Finance Corpn. Ltd. SR-203-A 06.72% (09-Jun-23) 1.82
Jamnagar Utilities & Power Pvt Ltd. SR- PPD 6 6.40% (29-Sep-26) 1.78
Data as of 31st October 2022
(Source: ACE MF, PersonalFN Research)

As of 31st October 2022, the fund held a diversified portfolio of 204 instruments, with top-10 holdings accounting for 24.41%. It has heavily relied on corporate and sovereign debt which constituted 56.05% and 26.98% of its portfolio, respectively. The fund has held 65.12% of its assets in 'AAA & equivalents' and had a sub-5% exposure to 'AA & equivalent' instruments, reflecting its low-risk preferences.

Moreover, taking into account the ongoing cycle of interest rate tightening, the fund has invested 6.29% of its assets in floating rate instruments and holds 4.67% of cash in its portfolio. CDs, CPs and PTC & Securitised debt together formed 6.02% of its portfolio. The maturity profile of the fund's portfolio is in line with its investment objectives.

#5: IDFC Banking & PSU Debt Fund

Launched in March 2013, IDFC Banking & PSU Debt Fund aims to generate returns through investments in debt and money market instruments predominantly issued by entities such as Banks, Public Sector Undertakings PSUs) and Public Financial Institutions (PFIs).

Table 6: Top-10 holdings of IDFC Banking & PSU Fund

Debt instrument % of assets
National Bank For Agriculture & Rural Development SR-19 F 8.50% (31-Jan-23) 8.39
Bank of Baroda (12-Jan-23) 4.95
Axis Bank Ltd. SR-3 7.60% (20-Oct-23) 4.24
Tri-Party Repo (TREPS) 3.87
364 Days Treasury Bill - 16-Mar-2023 2.87
Hindustan Petroleum Corporation Ltd. SR-II 6.80% (15-Dec-22) 2.74
ICICI Bank Ltd. SR- DOT16LB 07.6% (07-Oct-23) 2.52
Indian Railway Finance Corpn Ltd SR-145 06.59% (14-Apr-23) 2.23
364 Days Treasury Bill - 02-Mar-2023 2.22
HDFC Bank Ltd. (13-Dec-22) 1.99
Data as of 31st October 2022
(Source: ACE MF, PersonalFN Research)

The fund holds a well-diversified portfolio of high-quality debt spread across various maturity profiles and refrains from chasing spreads to generate superior returns. Moreover, it seems to favour PSU issuers which are quasi-government companies while investing in long-tenure papers.

As of 31st October 2022, the fund held 144 debt securities in its portfolio, and the top-10 holdings accounted for 36.02% of the portfolio. Papers rated 'AAA & Equivalents" constituted 81.97% of its portfolio, while sovereign debt and cash & cash equivalents accounted for 12.43% and 5.60%, respectively. CDs, corporate debt, and CPs had a weightage of 32.02%, 46.80%, and 3.15%, respectively, as per the portfolio has October 2022.

The five schemes discussed here have a proven track record and more importantly, they come from fund houses following sound investment processes and systems.

Do note that the Indian markets are still offering a relatively better real return (also known as inflation returns) than some of the developed economies.

When you invest in low-risk debt mutual funds, be aware of the tax implications. Dividends (in case you opt for the IDCW Option) and Short Term Capital Gains (STCG) will be added to your, the assessee's income and taxed as per the marginal rate, i.e., as per your income tax slab. On the Long Term Capital Gains (LTCG), i.e., when the holding period is 3 years or more in the case of debt funds, you, the investor/assessee, will be liable to pay 20% tax (after indexation).

Remember, when you invest in debt funds, your primary aim should be the preservation of capital; returns come secondary.

To select the best debt mutual fund, it is important to assess the following parameters:

  • The credit quality of the underlying securities

  • The average maturity profile

  • The historical performance

  • The risk ratios

  • The investment processes & systems at the fund house

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Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter