My spouse and I have savings of ₹16 lakh that would be used as down payment for purchasing a flat. The planned purchase could be within the next two years. In the meantime, we want to invest that amount. Can you suggest good options where the invested amount would not depreciate in value and at the same time earn decent returns, considering the current market conditions? In case of funds (bond/arbitrage/liquid or otherwise) please suggest some good options. What advantage does one category offer over the others?

Sanjeev V From the limited information given, it is not clear where your savings of ₹16 lakh currently lie; whether in savings bank account (SB A/C), in fixed deposits or other instruments.

Since you have stated that you now want to invest that amount, we are assuming that the sum of ₹16 lakh is in your SB A/Cs.

At the outset, it is good that you have savings to use as down payment which could reduce the loan burden.

However, it would have been ideal, had you invested your savings over the years and multiplied it. You are currently too close to your goal to earn good returns and at the same time, contain the downside. This restricts your investment options.

Since you are planning to purchase an apartment within the next two years and would not like to see a possible depreciation in value, equity market-linked options are not ideal. Investment in equity mutual funds require at least a five-to-seven year time horizon to go through a cycle and fetch good returns.

Recent events such as credit downgrades and defaults in bond repayments by companies have also shown that debt mutual funds, too, are not immune from market-linked risks. Moreover, your time horizon of two years means that you will have to pay short-term capital gains tax on your debt fund investments at your slab rate.

Debt funds require a holding period of at least three years to be treated as long-term.

Hence, you can stick to fixed deposits. Interest rates on bank fixed deposits are not at its best now. But a few private banks and small finance banks offer higher rates of 7.5-8.5 per cent for up to two-year deposits.

You can also spread your investments across a few institutions. That apart, if you are letting some sums lie in your SB A/C, you can also maximise returns on the same by using the sweep option. This option will sweep out excess funds into a deposit that earns higher returns, while giving you the flexibility to sweep it back into the SB A/C when needed, without any penalties. The returns on the sweep deposits will predominantly be equal to a fixed deposit of the same tenure.

This is higher than most SB A/C returns, which range around 4 per cent.

If you have a slightly higher risk appetite, you can opt for liquid funds or arbitrage funds for a part of your portfolio. Liquid funds invest in debt securities with a residual maturity of less than or equal to 91 days. Typically, a shorter maturity lowers interest-rate risk and credit risk. However, with liquid funds, too, not being spared in the recent credit events, SEBI has introduced some tightening measures to help prevent a recurrence. Over the last one- and three-year periods, lump-sum investments in liquid funds sport an average returns of 6-6.5 per cent.

It will have potential to move up in the future though, if the rates on the underlying short-term instruments improve. You can consider Nippon India Liquid, PGIM India Insta Cash and Edelweiss Liquid.

Arbitrage funds are hybrid funds that can be considered as an alternative to liquid funds. Arbitrage MFs try to capitalise on the price differential of a stock between two markets, such as cash and futures markets.

The risk in these funds is, therefore, similar to of liquid funds.

Arbitrage funds are treated as equity funds for tax purposes. Hence, gains over one-year period itself are considered long-term and are taxed at 10 per cent over ₹1 lakh. The returns generated by arbitrage funds depend on the volatility in the equity market and the prevailing short-term rates in the money market.

Over the past one- and three-year periods, lump-sum investments in arbitrage funds have given around 6 per cent returns on an average. ICICI Prudential Equity Arbitrage, Nippon India Arbitrage, Kotak Equity Arbitrage and IDFC Arbitrage are some of the funds you can consider.

Send your queries to mf@thehindu.co.in

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