I need to invest Rs 10 lakhs. I want the entire amount back by 2022. I do not want to take a risk in any equity related product. Will a fixed deposit be good option? FMP? ICICI Prudential Liquid Fund? A mix of Principal Hybrid Fund and IDFC Credit Risk fund and Bond Fund? Kindly suggest some alternatives.
- Aashish
No information has been provided on applicable tax bracket and exact time horizon, which will help in calculating the tax liability.
You need to evaluate your investment from various perspectives:
In case of investments in a fixed deposit (FD), the interest income is added to income and taxed at the marginal rate. In the case of debt funds and Fixed Maturity Plans (FMPs), the gains are taxed at 20% with indexation (assuming a holding period of over 3 years).
Open-ended debt funds can be redeemed earlier (subject to exit load periods which are typically around 0 to 6 months) unlike FDs which would incur a penalty on redemption. FMPs can only be redeemed on maturity. They are traded on an exchange but the liquidity on offer is limited.
FDs issued by banks are relatively safer than debt funds. For investment in debt funds, one should evaluate the credit quality of the fund before investing.
In case of FDs, the maturity amount is known in advance, which is not the case in debt funds wherein the investment risk is borne by the investor.
Given your desire to avoid equity exposure, hybrid funds would not be suitable for your portfolio, particularly aggressive hybrid funds which involve about 65-80% equity exposure, thereby impacting investor returns aversely.
Credit risk funds involve investments in relatively lower quality instruments which are prone to downgrades and consequent mark-down in valuations which impacts investor returns adversely.
Liquid funds are a sound option as they invest in high credit quality instruments and involve very low duration risk. However, they carry a lower yield than other fund categories discussed above.
For investments in debt funds, given the current credit scenario prevalent in markets; and reports of forced FMP rollovers on account of defaults in portfolio securities; it is advisable to invest in open-ended debt funds across accrual funds such as Banking PSU Funds, ST Income funds, Ultra Short term funds and Corporate Bond Funds. Banking & PSU funds are relatively safer bets from a credit perspective, as these have a mandate to invest atleast 80% corpus in banks and PSUs.
You can look to allocate about 80% of the corpus into Banking & PSU funds and the remaining 20% into ultra short-term funds of high credit quality.
To select the right funds, we recommend that you can view the fund analyst reports here.
If you want to track the performance of funds, this tool will help you.
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