What is the Safest Type of Mutual Fund? (Expert Advice)
A client in Abu Dhabi kept ₹40 lakh in his NRO savings account for three years. "At least it's safe," he said.
When we showed him the math, he'd lost nearly ₹7 lakh in purchasing power to inflation.
His "safe" choice was quietly destroying his wealth.
That fear of losing money is real for NRIs.
But parking everything in a savings account isn't safety. It's slow erosion.
At Belong, NRIs across the UAE ask us this constantly: "If I don't want risk, what's actually safe in mutual funds?"
The answer isn't one fund. It's understanding the safety spectrum.
This guide ranks every low-risk category, compares returns, and shows what truly protects your money.
What Makes a Mutual Fund "Safe"?
Safety comes down to three things.
Low volatility.
The fund's value doesn't swing wildly. Overnight funds barely move. Mid-cap equity funds can drop 15% in a bad month.
High credit quality.
The fund invests in instruments from borrowers unlikely to default. Government securities carry sovereign backing. AAA-rated corporate bonds from CRISIL or ICRA are next.
Short maturity.
Shorter-duration instruments are less sensitive to interest rate changes.
A fund holding bonds maturing tomorrow has almost zero interest rate risk. One holding 10-year bonds can lose value when RBI raises rates.
No mutual fund is "guaranteed" like a bank FD insured up to ₹5 lakh by DICGC. But certain categories come very close.
SEBI classifies all mutual funds into defined categories with strict investment mandates.
👉 Tip: "Low risk" and "no risk" aren't the same. Even the safest mutual fund carries some risk. Match the risk level to when you need the money.
Ranking the Safest Mutual Fund Types
Overnight funds are the safest mutual fund type available.
They invest only in securities maturing the next business day. Virtually no credit risk, no interest rate risk, no lock-in. The trade-off: returns barely beat a savings account. Best for parking money you need within days.
Liquid funds step up in both return and risk.
They hold treasury bills, commercial paper, and certificates of deposit maturing within 91 days. Returns beat savings accounts and most short-term FDs. Withdrawals typically process within 24 hours.
👉 Tip: For emergency funds or money waiting to be deployed, liquid funds beat a savings account on returns while keeping access almost instant.
Arbitrage Funds: The Safe Fund Most NRIs Miss
Arbitrage funds exploit tiny price gaps between cash and futures markets. The fund buys a stock in one market and simultaneously sells in the other, locking in a small profit regardless of market direction.
Returns look modest, around 7% to 8% annually. But here's the NRI edge: SEBI classifies these as equity funds (they hold 65%+ in equities). Long-term gains above ₹1.25 lakh are taxed at just 12.5%, not at your slab rate like debt fund gains.
For NRIs in the 30% bracket, this difference is real. A debt fund returning 7% nets under 5% after tax. An arbitrage fund returning the same 7% keeps significantly more.
The NRI Tax Trap With Debt Funds
This is where safety-focused NRIs get blindsided. After 2023 budget changes, all debt mutual fund gains are taxed at your income slab rate, regardless of holding period. No indexation benefit.
For an NRI taxed at 30%, a debt fund earning 7% yields roughly 4.9% post-tax. That barely matches inflation. Compare this against NRE FD rates, where 7% interest is completely tax-free on NRE accounts.
The smarter route? GIFT City mutual funds enjoy tax-free treatment under Section 10(4D) of the Income Tax Act. For UAE-based NRIs with no local capital gains tax, this means completely tax-free returns.
Source: Income Tax Act, Section 10(4D)
👉 Tip: Before choosing any "safe" debt fund, calculate post-tax returns first. The tax rules for NRI investments can turn a decent return into a poor one.
GIFT City USD FDs: Safety Without Currency Risk
If capital protection with zero currency risk is the goal, GIFT City USD FDs may be the safest option for NRIs earning in dollars or dirhams.
Your deposit stays in USD. Returns come in USD. No rupee depreciation eating into your money. Under current IFSCA regulations, interest is tax-free in India. Belong provides access to these deposits with rates you can compare using our FD rates tool.
A combination of GIFT City USD FDs for capital protection and arbitrage funds for tax-efficient returns makes a strong low-risk portfolio. Track opportunities using GIFT Nifty and explore alternative investment funds for diversification.
Matching the Right Safe Fund to Your Timeline
Within 1 week: Overnight funds.
1 to 3 months: Liquid funds.
3 to 12 months: Ultra short duration or money market funds.
1 to 3 years: Arbitrage funds for tax efficiency.
3 to 5 years:Conservative hybrid funds for modest growth with a safety cushion.
Before investing, complete KYC as an NRI and link your NRE or NRO account. FEMA rules determine which accounts you can invest from.
What Should You Do Next?
The safest mutual fund isn't always the smartest choice. Overnight and liquid funds protect capital but barely grow it. Arbitrage funds add tax efficiency. Conservative hybrids offer modest growth.
For NRIs in the UAE, the real advantage comes from combining these with GIFT City products that eliminate currency risk and tax drag.
Thousands of NRIs across the GCC are building safer portfolios through our WhatsApp community, sharing strategies and getting clarity on exactly these questions. Join them.
Download the Belong app to compare FD rates, explore mutual funds, and start making your money truly safe.
Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. Past performance is not indicative of future results. This article is for educational purposes only. Consult a qualified financial advisor before making investment decisions.
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