Which mutual funds are suitable to invest for two years?

I am a student. At present, I am investing in recurring deposit which offers 6.5 per cent. I want to earn higher returns through mutual funds. I am able to save around Rs 1,000 every month. Please suggest me some funds to invest with a time period of two years.

-- Anadi Kackar

Vivekh Pathak, founder, Finance and You, responds:



Since you have mentioned time period as two years, equity Investments are not recommended. Minimum time horizon for investing in equity funds should be at least five years.

As you are a student, I assume, you do not have any earnings and this is your savings (pocket money). In this case, you can invest in short duration funds and money market funds. It would be risky to venture into medium duration to dynamic bond funds in current scenario with crude at a high and interest rates outlook not clear.

Assuming you have a shorter time period and would withdraw within two years, you may not fall in the taxable bracket. Or, if you start earning in the near future, you may be taxed at NIL, 5 per cent or 20 per cent.

You can expect similar post tax returns from short duration debt funds and bank deposits. So, if you happen to carry on a little longer i.e. three years, the taxation would change to 20 per cent with indexation. You may be better off withdrawing just before three years, in case you fall in 5 per cent bracket so as to save on taxes, else you would pay 20 per cent post indexation after three years of investment.
Money market and short duration fund are low on interest rate sensitivity hence can be a good option.