The safest mutual funds

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I borrowed Rs 20 lakh (Rs 2 million) towards buying a property which I temporarily put on hold for a year. Hence, I would like to invest it in a mutual fund for the time being.

Can you suggest some good funds that are not risky?

 I am paying an interest of 10.5% on this money and hence would expect to invest in funds that give me a return of at least 15%. 

- Ranganathan

You are being way too optimistic to expect an annual return of 15% from a mutual fund that is not considered risky. No risk-free investment can provide you with that kind of return.

Since this is borrowed money that you will be needing shortly and therefore cannot afford to lose, you need to play safe.

Do not get lured by the performance of equity markets in the recent years. Don't think you can invest this money in the hope of making a quick profit.

If the stock market takes an ugly turn, you might land up in a crisis. There is no way you can fully recover your interest payment by investing this money without taking risks. Therefore, you will have to bear this interest cost for the time being.  

If you still want to invest in mutual funds, liquid funds are your best bet. But you can only expect a return of around 5% per annum (see the answer below to understand these funds).

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It is said that liquid funds are safe. How safe are they?

Can I expect a return of at least 5% from such funds? If they invest in government backed instruments, then the returns are also assured to some point. I mean a 4% return is easily achievable, isn't it?

Can you suggest some good funds?

- Bikram

Liquid funds are the safest category of mutual funds. They are also known as ultra short-term bond funds or cash funds.

These funds invest in fixed return instruments of short maturities. Their main aim is to preserve the principal and earn a modest return, so the money you invest will eventually be returned to you with a little something added.

Examples of such investments include Treasury Bills, Commercial Paper, and Certificates of Deposit.

Treasury Bills, commonly referred to as T-bills, are short-term government securities with maturities of no more than one year. They are considered risk-free because they are issued by the government.

CP is a debt instrument issued by companies to meet short-term financing needs.

A CD is an interest-bearing, short-term debt instrument issued by a bank.

Considering that money market instruments are some of the most secure instruments, these funds are good investments for conservative investors for their short-term investment needs. 

The credit quality of the investments is high therefore the risk of default is low. The maturity is low so the loss due to the adverse movements in the interest rates is negligible. A long-term fixed-return instrument gets affected as interest rates change in the economy.

Though the returns are not fixed (as in case of a bank deposit), the risk of losing money is minimal.

Expecting a 5% per annum is quite reasonable. In the past five years, the average returns from such funds are mentioned below.

Canliquid Retail and LICMF Liquid are two of the better liquid funds.

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