LIC Mutual Fund: 4 Lower-Risk Schemes to Consider Beyond Bank FDs for Different Investment Goals

Bank fixed deposits remain a popular choice among Indian investors who prioritise stability and predictable returns. However, when inflation remains elevated, investors may also look at other options that have the potential to generate better returns while keeping their exposure to market volatility relatively limited.

LIC Mutual Fund offers several schemes across debt, arbitrage and hybrid categories that cater to investors with different time horizons and risk profiles. Four such schemes highlighted for relatively conservative investors are LIC MF Banking & PSU Debt Fund, LIC MF Savings Fund, LIC MF Arbitrage Fund and LIC MF Conservative Hybrid Fund.

These funds differ considerably in how and where they invest. Some primarily hold debt securities, while others use arbitrage strategies or combine debt with limited equity exposure.

Importantly, mutual funds are not the same as bank fixed deposits. Returns are not guaranteed, and investors should understand the risks, taxation, costs and investment horizon before choosing a scheme.

1. LIC MF Banking & PSU Debt Fund

The LIC MF Banking & PSU Debt Fund primarily focuses on debt and money-market securities issued by banks, public sector undertakings, public financial institutions and similar entities permitted under the scheme's mandate.

Unlike an equity-oriented mutual fund, the scheme does not depend primarily on stock-market movements to generate returns.

This category may appeal to investors who want exposure to fixed-income securities rather than equities and are willing to accept the interest-rate and credit risks associated with debt mutual funds.

The source suggests an investment horizon of around one to three years for investors considering this type of scheme.

However, a debt mutual fund should not be described as a guaranteed alternative to an FD. Its net asset value can fluctuate because of changes in interest rates, credit conditions and other market factors.

2. LIC MF Savings Fund

People often keep surplus money in savings accounts because it provides easy access to funds. However, investors who do not need the money immediately may consider short-duration investment alternatives.

LIC MF Savings Fund is presented as a low-duration debt-oriented option. Such funds generally invest in shorter-maturity debt and money-market instruments.

One of the attractions of this category is the attempt to balance liquidity with the possibility of earning returns on short-term surplus funds.

According to the supplied information, investors with a time horizon ranging from approximately six months to two years may consider examining this category.

It is important, however, to compare the fund's portfolio, expense ratio, exit-load provisions, historical performance and risk indicators rather than choosing it solely because its potential return may appear higher than that of a savings account.

3. LIC MF Arbitrage Fund

LIC MF Arbitrage Fund follows a different strategy from conventional debt funds.

Instead of simply buying shares in the hope that their prices will increase, an arbitrage strategy seeks to capture price differences between the cash and derivatives segments of the market.

For example, when the same security is available at different effective prices in the cash and futures markets, an arbitrage fund may construct positions designed to benefit from that difference.

This strategy can result in a risk profile that is different from that of a conventional diversified equity fund.

Another factor that often attracts investors to arbitrage funds is their taxation treatment. Depending on prevailing Indian tax rules and the fund's portfolio structure, arbitrage funds may receive equity-oriented tax treatment.

However, investors should verify the latest tax rules applicable at the time of investment because taxation regulations can change.

The source identifies this category as potentially relevant for investors looking at a relatively short holding period, particularly those who also consider post-tax returns when comparing investment options.

4. LIC MF Conservative Hybrid Fund

Investors willing to accept somewhat more market fluctuation in exchange for long-term growth potential may look at conservative hybrid funds.

Unlike a pure debt scheme, a conservative hybrid fund combines debt securities with a smaller allocation to equities.

The debt component is intended to provide relative stability, while equity exposure gives the portfolio an opportunity to participate in stock-market growth.

According to the supplied article, the fund maintains the larger portion of its portfolio in debt instruments while allocating a smaller share to equities.

Because stocks form part of the portfolio, investors should expect greater fluctuations than they might experience with a pure debt-oriented scheme.

The source suggests that this type of investment may be more appropriate for people who can remain invested for approximately three to five years or longer.

How Are These Funds Different From a Bank FD?

The biggest distinction is certainty.

With a conventional bank fixed deposit, the applicable interest rate is known when the deposit is opened, subject to the bank's terms and conditions. Mutual fund returns, on the other hand, depend on the performance of the underlying portfolio and are not assured.

Liquidity can also differ. Premature withdrawal from an FD may attract a penalty or a lower applicable interest rate. Mutual funds generally allow redemption, although exit loads, settlement periods, taxes and market conditions can affect the amount an investor ultimately receives.

Therefore, choosing between an FD and a mutual fund should not be based only on which one has generated a higher historical return.

Should You Invest Through SIP or Lump Sum?

A Systematic Investment Plan, or SIP, allows an investor to put a predetermined amount into a mutual fund periodically instead of investing the entire amount at once.

SIPs can be particularly useful for investors who want to build an investment portfolio gradually and maintain investment discipline.

However, SIP is an investment method rather than a separate asset class, and it does not eliminate the underlying risks of a mutual fund.

Whether SIP or lump-sum investing is more suitable depends on factors including available funds, investment horizon, risk tolerance and the type of scheme selected.

What Investors Should Check Before Choosing a Scheme

The four LIC Mutual Fund schemes serve different purposes and should not be treated as interchangeable products.

An investor looking to park money for a shorter period may have different requirements from someone building wealth over five years or longer. Similarly, someone uncomfortable with equity-market fluctuations may not find a hybrid fund suitable even if it offers greater long-term growth potential.

Before investing, it is important to examine the scheme's risk level, portfolio composition, investment objective, expense ratio, exit load, taxation and recommended holding period.

Past performance should also not be interpreted as a guarantee of future returns.

Bank FDs and mutual funds have fundamentally different risk-return characteristics. Investors should therefore choose an option based on their financial goals and ability to tolerate risk rather than simply chasing a higher return figure.

Disclaimer: This article is for informational purposes only and should not be considered investment advice. Mutual fund investments are subject to market risks. Returns are not guaranteed, and investors should read all scheme-related documents carefully and consider consulting a qualified financial adviser before investing.