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As the name implies, a high-return, low-risk mutual fund is an investment vehicle designed to offer minimal risk while delivering steady, reliable returns.
How low-risk mutual funds operate in the financial market.
Low-risk mutual funds are investment options designed to offer minimal risk while delivering steady returns. By allocating a significant portion of their assets to debt instruments, such as government bonds and high-quality fixed-income securities, these funds help navigate market uncertainties and combat inflation.
While they may not offer aggressive growth, they play a crucial role in portfolio diversification and help stabilise your overall risk-reward ratio.
Features
Asset Allocation: As mentioned above, with low-risk mutual funds, a major portion of assets is allocated to debt instruments. That makes it a highly secure and stable option for mutual fund investors.
Risk-Reward Ratio: While mutual funds are always subject to market risks, low-risk mutual funds can minimise threats posed to your principal sum. However, the likelihood of earning a hefty return is also low, as fund managers place such assets into low-volatility segments.
Taxability of Low-Risk Mutual Funds
1. Long-Term Capital Gains (LTCG) Tax:
If investors hold their low-risk mutual fund units for more than three years, the returns are classified as long-term capital gains and are taxed at 20% with indexation benefits. Indexation helps reduce tax liability by adjusting the purchase price for inflation.
2. Short-Term Capital Gains (STCG) Tax:
If the investment is redeemed within three years, the gains are treated as short-term and added to the investor’s income, taxed according to their applicable income tax slab.
3. Tax Deducted at Source (TDS):
There is no TDS applicable on gains earned from low-risk mutual funds, making them a cleaner option for investors in terms of tax administration.
New investors, especially those unfamiliar with the complexities of various fund options, often gravitate towards low-risk mutual funds due to their conservative risk appetite. These investors typically prioritise return stability over high profits. Since low-risk mutual funds primarily invest in debt instruments, they offer the safety of fixed deposits along with reasonable returns. Financial advisors commonly recommend these funds to individuals seeking to maintain high liquidity in their portfolios.
Moreover, low-risk mutual funds are well-suited for investors with a short investment horizon, typically less than a year, as they help meet short-term financial goals with minimal risk. However, it is essential to conduct a thorough evaluation of personal financial objectives, risk tolerance, and investment duration before committing capital to these funds.
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delhi, India, India
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