Last month, a doctor from Sharjah messaged our WhatsApp community asking a question we hear almost daily: "I've saved AED 200,000. I want to invest in India, but I can't afford to lose it. What's safe?"
He had worked 15 years in the UAE. This money was for his daughter's education in five years. Taking risks wasn't an option.
At Belong, we've helped hundreds of NRIs in exactly this situation. They've read conflicting advice online. Some articles push equity funds with scary volatility charts. Others recommend FDs with returns that barely beat inflation. The confusion is real.
This guide cuts through the noise. We'll show you exactly which mutual funds protect your capital while delivering reasonable returns.
We'll cover what "low risk" actually means in numbers. We'll explain the tax trap most NRIs fall into with debt funds. And we'll share a smarter alternative that many Dubai-based investors are now choosing instead.
What Makes a Mutual Fund "Low Risk"?
Before we list specific funds, let's define what we mean by low risk. It's not just marketing speak.
A low-risk mutual fund has three characteristics. First, it invests primarily in stable assets like government bonds, treasury bills, and high-rated corporate debt. Second, it shows minimal price fluctuation over short periods. Third, it carries negligible credit risk because the underlying securities are AAA-rated.
The trade-off is straightforward. Lower risk means lower returns. These funds typically deliver 6-10% annually. Compare that to equity funds that might swing 20% in either direction within months.
👉 Tip: Check the fund's "standard deviation" in its fact sheet. Lower numbers indicate less volatility. Anything below 1% is considered very low risk.
Who Should Invest in Low-Risk Mutual Funds?
Not everyone needs low-risk funds. But for certain profiles, they're essential.
Conservative investors who prioritise capital protection over aggressive growth benefit most from these funds. Retirees seeking steady income without worrying about market crashes find them ideal. NRIs saving for specific goals like children's education or property down payments in 3-5 years should consider them seriously.
First-time investors testing mutual fund waters often start here too. The stability helps build confidence before moving to riskier options.
If you're an NRI earning in dirhams but planning to spend in rupees within a few years, these funds reduce one layer of uncertainty while you still manage currency risk.
Types of Low-Risk Mutual Funds Available to NRIs
India's mutual fund market offers several categories designed for risk-averse investors. Each serves a different purpose.
Liquid Funds
Liquid funds invest in debt instruments maturing within 91 days. Think treasury bills, commercial paper, and certificates of deposit. They're essentially a parking spot for money you might need soon.
Returns typically range from 6-7% annually. That's better than savings accounts (3-4%) but with similar accessibility. You can redeem money within one business day.
The risk here is almost nil because securities mature so quickly. There's no time for market conditions to impact their value significantly.
Overnight Funds
If liquid funds feel risky to you, overnight funds go one step further. They invest only in securities maturing in one day.
Returns hover around 5.5-6% annually. The SBI Overnight Fund has delivered a 5-year return of approximately 5.3% with an expense ratio of just 0.07%.
These funds are genuinely the lowest-risk option in mutual funds. You're essentially lending money overnight to banks and institutions. The chance of default in 24 hours is virtually zero.
Arbitrage Funds
Arbitrage funds exploit price differences between cash and derivatives markets. A fund buys a stock in one market and simultaneously sells it in another at a higher price. The price difference becomes your return.
What makes them low risk? The fund always has offsetting positions. If the stock price falls, the loss on one position is covered by gain on another. Market direction doesn't matter.
\Returns average 7-8% annually. The Kotak Arbitrage Fund has delivered 7.89% over three years with an AUM of ₹72,773 crore as of November 2025.
The added benefit: arbitrage funds are taxed as equity funds despite behaving like debt. More on this in the taxation section.
Conservative Hybrid Funds
These funds blend debt (75-90%) with equity (10-25%). The small equity portion adds slight growth potential while debt maintains stability.
The HDFC Hybrid Debt Fund has returned 10.54% over five years. SBI Conservative Hybrid Fund delivered 9.79% in the same period.
Conservative hybrids suit investors who want slightly higher returns than pure debt funds but aren't ready for full equity exposure.
👉 Tip: For NRIs, stick to conservative hybrid funds from large AMCs like HDFC, SBI, or ICICI. Smaller fund houses sometimes take higher credit risks to boost returns.
Top 5 Arbitrage Funds for Conservative NRIs
Arbitrage funds deserve special attention because they combine low risk with favorable tax treatment. Here are the top performers:
Fund Name | 3-Year Return | 5-Year Return | AUM (Nov 2025) | Expense Ratio |
|---|---|---|---|---|
Kotak Arbitrage Fund | 7.89% | 6.62% | ₹72,773 Cr | 0.40% |
Invesco India Arbitrage Fund | 7.90% | 6.68% | ₹27,562 Cr | 0.40% |
Tata Arbitrage Fund | 7.83% | 6.28% | ₹20,154 Cr | 0.30% |
Edelweiss Arbitrage Fund | 7.81% | 6.61% | ₹16,720 Cr | 0.40% |
ICICI Prudential Equity Arbitrage Fund | 7.69% | 6.43% | ₹32,196 Cr | 0.40% |
Source: Groww, 5paisa, December 2025
Kotak and Invesco lead the pack with consistent performance. Tata stands out for having the lowest expense ratio at 0.30%.
All these funds accept NRI investments through NRE or NRO accounts. Minimum SIP amounts range from ₹100 to ₹1,000 depending on the fund.
Top Conservative Hybrid Funds for Higher Returns
If you can accept slightly more volatility for better returns, conservative hybrid funds deliver 9-11% annually.
Fund Name | 3-Year Return | 5-Year Return | Debt Allocation | Min SIP |
|---|---|---|---|---|
HDFC Hybrid Debt Fund | 10.43% | 10.54% | 74.7% | ₹100 |
SBI Conservative Hybrid Fund | 10.07% | 9.79% | ~80% | ₹500 |
Aditya Birla Sun Life Regular Savings Fund | 10.07% | 10.38% | ~75% | ₹100 |
UTI Conservative Hybrid Fund | ~9.5% | ~9.3% | ~80% | ₹500 |
Kotak Debt Hybrid Fund | ~9.3% | ~9.1% | ~75% | ₹100 |
Source: Groww, Value Research, December 2025
HDFC Hybrid Debt Fund consistently outperforms peers with its blend of 74.7% debt and 25.3% equity. The small equity exposure catches upside during bull markets while the debt cushion protects during downturns.
👉 Tip: Look at the fund's debt portfolio quality. SEBI mandates that conservative hybrids invest only in AAA and AA-rated securities. Verify this in the monthly fact sheet before investing.
Taxation on Low-Risk Mutual Funds for NRIs: The Hidden Trap
Here's where most NRIs make costly mistakes. The tax rules changed significantly in 2023 and 2024.
Debt Fund Taxation (Post April 2023)
For debt funds purchased after April 1, 2023, the government removed long-term capital gains benefits. All gains are now taxed at your income tax slab rate, regardless of holding period.
For most NRIs, this means paying 30% tax plus cess on debt fund returns. Add TDS of 30% that gets deducted at redemption, and your 7% liquid fund return shrinks to about 5% post-tax.
Fund Type | TDS Rate for NRIs | Tax Rate | Effective Return (Pre-tax 7%) |
|---|---|---|---|
Liquid Funds | 30% | Slab rate (up to 30%) | ~4.9% |
Overnight Funds | 30% | Slab rate (up to 30%) | ~4.9% |
Conservative Hybrid | 30% | Slab rate (up to 30%) | ~7% (on 10% return) |
Source: AMFI, Kotak Mutual Fund
Arbitrage Fund Taxation (The Advantage)
Arbitrage funds maintain more than 65% equity exposure at month-end. This classifies them as equity funds for tax purposes, even though they behave like debt funds.
For NRIs:
- Short-term gains (held less than 12 months): 20% tax
- Long-term gains (held more than 12 months): 12.5% tax above ₹1.25 lakh exemption
Compare 12.5% to 30%. That's the arbitrage fund advantage.
Source: Zerodha Z-Connect, Bajaj Finserv
👉 Tip: For holding periods beyond one year, arbitrage funds are significantly more tax-efficient than liquid or debt funds for NRIs. Use our Residential Status Calculator to confirm your tax status first.
The DTAA Benefit Many NRIs Miss
India has Double Taxation Avoidance Agreements with 85+ countries including the UAE. Under India-UAE DTAA, you can claim tax credit for taxes paid in India against your UAE tax liability.
Since the UAE has zero income tax, this might seem irrelevant. But it matters if you're in the 30% bracket and considering moving countries later. The TDS paid in India can be adjusted when you file your Indian ITR.
To claim DTAA benefits, you need a Tax Residency Certificate (TRC) from your country of residence. Keep this document updated annually.
Source: SBNRI
A Smarter Option: GIFT City Mutual Funds
Here's what many NRIs don't know. There's an alternative that eliminates most of these tax headaches.
GIFT City mutual funds operate within India's International Financial Services Centre. They're regulated by IFSCA, not SEBI. And they come with significant tax advantages.
Key Benefits for NRIs
No TDS on redemption. When you redeem a regular Indian mutual fund, TDS gets deducted immediately. You claim refunds when filing ITR months later. GIFT City funds transfer the full amount to your account.
Tax-free in India for qualifying funds. Under Section 10(4D) of the Income Tax Act, capital gains from IFSCA-registered funds are exempt from Indian tax. You pay taxes only in your country of residence.
For UAE NRIs, this means completely tax-free returns. The UAE has no capital gains tax. Combined with India's exemption, your investment grows without any tax leakage.
USD denomination. Your investment stays in dollars. No forced rupee conversion. No currency depreciation eating into your returns.
Source: IFSCA, GetBelong GIFT City Guide
GIFT City Options for Conservative Investors
The GIFT City ecosystem offers several low-risk options:
Product | Minimum Investment | Expected Returns | Risk Level |
|---|---|---|---|
USD Fixed Deposits | $1,000 | 5-6% | Very Low |
GIFT City Mutual Funds | $500 | 8-12% (varies) | Low to Moderate |
Category III AIFs | $75,000 | 10-15% | Moderate |
Source: Belong FD Comparison Tool, IFSCA Bulletin Q1 2025
The Tata India Dynamic Equity Fund, launched at GIFT City in September 2025, accepts investments starting at just $500. This is the first retail inbound mutual fund from GIFT City, making tax-efficient investing accessible to average NRIs.
For conservative investors, GIFT City USD fixed deposits at 5-6% might actually deliver better after-tax returns than Indian debt funds at 7% but taxed at 30%.
👉 Tip: Compare our GIFT City FD rates with regular NRE/NRO FD rates. Factor in the zero TDS and currency protection to see the real difference.
How to Choose Between Regular and GIFT City Funds
Use this decision framework:
Choose regular Indian mutual funds if:
- You're investing for less than one year
- You prefer the familiarity of SEBI-regulated products
- Your investment amount is small (under ₹1 lakh)
- You don't mind the tax burden
Choose GIFT City products if:
- You're in a zero-tax country like UAE
- You want USD denomination to avoid rupee depreciation
- Your investment horizon is 3+ years
- You're investing larger amounts where tax savings become substantial
Many NRIs in our community use both. They keep emergency funds in liquid funds for quick rupee access. They put long-term savings in GIFT City for tax efficiency.
Step-by-Step: How NRIs Can Invest in Low-Risk Mutual Funds
For Regular Indian Mutual Funds
Step 1: Complete KYC You need PAN card, address proof, and passport. Most AMCs accept online KYC through video verification. Use our guide on Mutual Fund KYC for NRIs for detailed steps.
Step 2: Link NRE/NRO Account You'll need an NRE account (for repatriable investments) or NRO account (for non-repatriable). Most banks like HDFC, ICICI, and SBI allow online account opening from UAE.
Step 3: Choose Your Fund Use our Mutual Funds Explorer to compare options. Filter by risk level and past performance.
Step 4: Invest via SIP or Lumpsum SIP works well for regular investing. Lumpsum suits idle cash you want to park immediately. Most low-risk funds accept minimum SIP of ₹100-500.
For GIFT City Funds
Step 1: Open Global Savings Account Banks like ICICI, HDFC, SBI, and Axis operate IFSC Banking Units in GIFT City. Open an account in USD, AED, or other currencies.
Step 2: Complete Video KYC IFSCA implemented video KYC in 2025. The process takes 15-30 minutes and doesn't require visiting India.
Step 3: Fund Your Account Transfer from your existing NRE account or directly from abroad.
Step 4: Select Investment Products Start with USD FDs for lowest risk. Graduate to mutual funds or AIFs as you get comfortable. The Belong app simplifies this entire process.
👉 Tip: Check if your country of residence has FATCA restrictions. US and Canada-based NRIs face complications with certain Indian mutual funds. GIFT City offers simpler compliance for most nationalities.
Common Mistakes NRIs Make with Low-Risk Funds
After advising hundreds of NRIs, we've seen patterns in mistakes. Avoid these:
Ignoring tax implications. A 7% return taxed at 30% is worse than a 6% return taxed at 12.5%. Always calculate post-tax returns.
Choosing based only on past returns. In low-risk funds, expense ratios matter more than slight return differences. A fund with 0.30% expense ratio beats one with 0.50% over time.
Not updating residential status. If your days in India change, so does your tax status. Use our Compliance Compass to stay on track.
Treating switching as tax-free. Moving money from one mutual fund to another triggers capital gains tax. It's a redemption followed by a fresh purchase.
Putting all money in one fund. Even within low-risk categories, diversify. Keep some in liquid funds for emergencies, some in arbitrage for tax efficiency, and some in conservative hybrids for growth.
Final Thoughts: Safety Without Sacrificing Returns
Low-risk investing doesn't mean accepting poor returns. It means being smart about where you put your money based on your goals, tax situation, and time horizon.
For most NRIs in the UAE, here's what we recommend:
Emergency fund (6 months expenses): Keep in liquid funds for quick access. Accept the tax inefficiency for the convenience.
Short-term goals (1-3 years): Arbitrage funds offer the best combination of low risk and tax efficiency. The 12.5% LTCG rate beats 30% slab rate on debt funds.
Long-term goals (3+ years): GIFT City products shine here. Tax-free growth in USD currency removes multiple layers of uncertainty.
At Belong, we've built tools specifically for NRIs navigating these choices. Our FD comparison tool lets you see rates across banks instantly. Our Mutual Funds Explorer filters GIFT City options by risk and return. And our Compliance Compass ensures you're always on the right side of regulations.
If you have questions about which low-risk funds suit your specific situation, join our WhatsApp community where many NRIs discuss their investment decisions daily. Or download the Belong app to start exploring your options.
Your hard-earned savings deserve both safety and smart growth. You don't have to choose one over the other.
Sources:
- AMFI - Tax Regime for Mutual Funds
- Groww - Best Arbitrage Mutual Funds
- Groww - Best Conservative Hybrid Mutual Funds
- Value Research - SBI Conservative Hybrid Fund
- Kotak Mutual Fund - Taxation
- Zerodha Z-Connect - NRI Tax Rules
- Bajaj Finserv - NRI Mutual Fund Taxation
- IFSCA - Fund Management Regulations
- GetBelong - GIFT City Investment Guide
