I have Rs 10 lakh. In what avenues can I park that money? I want liquidity. I want better returns than my saving account.
After a year, I want to purchase a house which will cost me Rs 55 lakh. This money will be used towards that.
Given the importance of the goal and the very short time horizon of 12 months, safety and liquidity are the prime concern here. Hence, the corpus should be entirely invested into income-oriented assets to avoid risks of significant drawdowns.
The Reserve Bank of India has cut the policy rate sharply since 2019 and has announced a slew of measures to mitigate the slowdown in the economy, which got further aggravated due to the COVID-19 pandemic. The measures, along with abundant liquidity in the banking system, have resulted in yields falling substantially, particularly at the shorter end of the yield curve. This is also reflected in the yield-to-maturity of shorter duration funds.
Banks too have followed suit and have sharply cut down the deposit rates on offer.
To earn better returns than those offered on savings accounts and also mitigate duration risk, you can look to allocate about 70% of the corpus to funds maintaining a duration of up to 1 year such as ultra-short, low duration and money-market funds.
You can also look to allocate some exposure to arbitrage funds, which offer a favourable post-tax treatment compared to fixed-income funds.
From debt mutual fund categories, you should invest into funds with a very high credit quality (low credit risk) and low interest rate risk.
The remaining 30% allocation can be invested into funds with a relatively higher duration to benefit from a higher yield pick-up, such as short-duration, corporate bond and Banking & PSU categories. However, you should note that these funds do carry some interest rate risk.
Check the performance of various fund categories
Check fund analysis
Compared to bank fixed deposits which charge penalties in case of premature withdrawals, most funds belonging to these categories do not levy any exit loads. These funds can be redeemed any time and the entire redemption proceeds would be credited to your account by T+2 business days (T+3 in case of arbitrage funds) - ‘T’ being the date of redemption. But they would attract short-term capital gains tax at the marginal rate of tax as applicable to you.
Please consult your financial adviser before making any investment decisions.
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