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Where to invest 5 lakhs for best returns in 12 months?

Ramalingam Kalirajan |10874 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Nov 04, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Suresh on Nov 03, 2024Hindi

I have 5 laks Rs as on 01 Nov 24 . where should I invest for best returns .time period is 12 months.

Ans: For a 12-month period, the aim should be to protect your capital while generating returns higher than a regular savings account. Short-term investing in India offers options that balance low risk with steady returns. Here are strategies for a 12-month horizon, tailored to align with both safety and returns.

1. Debt Mutual Funds: Balancing Growth and Safety

Debt mutual funds are one of the best options for short-term investments. They provide decent returns while generally being less volatile than equity.

Types of Debt Funds: Opt for ultra-short-term funds, low-duration funds, or money market funds. These funds invest in high-quality debt securities with low credit risk.

Tax Efficiency: If you fall into a lower tax bracket, debt funds might be a more tax-efficient choice than traditional options. Short-term capital gains from debt funds are taxed as per your income tax slab, so it’s advisable for investors in lower slabs.

Liquidity and Accessibility: Debt funds typically offer good liquidity, with redemption possible within 1-2 business days. This is beneficial if you anticipate needing funds suddenly.

2. Fixed Deposits: A Stable and Reliable Option

Bank fixed deposits (FDs) remain a popular choice for short-term savings in India. Many banks offer attractive interest rates, especially for senior citizens.

Interest Rates: Many banks now offer competitive rates, especially for FDs of one-year tenure. Look for promotional rates from private sector banks as well, which often pay slightly higher returns.

Safety and Risk: FDs come with the assurance of guaranteed returns and minimal risk. They’re also covered by deposit insurance up to Rs 5 lakh, adding an extra layer of safety.

Tax Implications: Interest earned on FDs is fully taxable as per your income tax slab. This might reduce net returns for those in higher tax brackets, making them more suitable if you’re in a lower bracket.

3. Corporate Fixed Deposits: Enhanced Returns with Slightly Higher Risk

If you're comfortable taking on a bit more risk, corporate fixed deposits could be an option. These deposits are offered by NBFCs and corporates and tend to offer higher interest rates than traditional bank FDs.

Risk Consideration: Choose well-rated corporate FDs (AA or AAA rating) to ensure the stability of returns. Higher-rated companies generally offer stable returns with lower default risks.

Interest Rates: These often exceed bank FD rates, providing a better return for a one-year term. However, assess your risk tolerance and check the financial health of the company offering the FD.

4. Arbitrage Funds: Leveraging Market Inefficiencies for Short-Term Gains

Arbitrage funds offer a way to capture returns by exploiting price differences in the equity and derivatives markets. They are typically low-risk in nature.

Benefits: Arbitrage funds tend to offer better tax treatment compared to FDs and debt funds. Long-term capital gains (above Rs 1.25 lakh) are taxed at 12.5%, while short-term capital gains are taxed at 20%.

Tax Efficiency: For investors in the higher tax bracket, this tax advantage can make arbitrage funds a preferable choice over FDs and debt funds.

Low Risk with Decent Returns: While the returns might not match pure equity, they generally outperform regular FDs, especially post-tax.

5. Liquid Funds: Ideal for Ultra-Low-Risk and Emergency Needs

If you prioritize liquidity and stability, liquid funds are an option. These funds invest in high-quality short-term instruments, typically with very low default risk.

Safety: Liquid funds generally carry minimal risk, as they invest in highly liquid, short-duration instruments like treasury bills and commercial papers.

Accessibility: Redemption is often possible on the same day, making liquid funds ideal if you want easy access to your funds without a penalty.

6. Recurring Deposits: Systematic and Guaranteed Returns

If you prefer a systematic approach, recurring deposits (RDs) allow you to invest monthly while providing guaranteed returns.

Flexibility and Control: You can set aside a fixed amount every month, which can help with disciplined savings. RDs are generally available in flexible tenures, including 12 months.

Interest Rates and Taxation: RDs earn interest comparable to FDs, but the interest is fully taxable. This option might be more suited for those in lower tax brackets looking for safe, fixed returns.

Strategies to Maximize Returns

Given your one-year timeline, a blend of investments might be optimal to achieve the best balance between returns, risk, and liquidity.

Primary Allocation: Consider putting around 50-60% into a high-quality debt mutual fund or a well-rated corporate FD. This will provide stable returns with controlled risk.

Secondary Allocation: Invest 20-30% in arbitrage funds if you want slightly higher tax efficiency.

Emergency Allocation: Set aside 10-20% in a liquid fund. This allocation ensures you have quick access if you need funds without impacting returns.

Avoid Equity Funds for Short-Term Goals

Given the volatility of equity markets, equity funds are unsuitable for a 12-month goal. Markets can fluctuate sharply in a short period, which could impact your capital.

Final Insights

Choosing the right combination of short-term investments requires balancing returns, risk tolerance, and liquidity needs. Given your 12-month horizon, avoid high-risk investments like equity funds or ULIPs.

For personalized advice tailored to your tax bracket, cash flow needs, and overall financial goals, consult with a Certified Financial Planner. By following this structured approach, you can safeguard your funds while aiming for above-average returns.

Best Regards,

K. Ramalingam, MBA, CFP
Chief Financial Planner
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.