Money Magazine - Where To Invest When You Have a 5 Year Deadline?

Ask any financial expert about your options to invest your money if your time horizon is more than 5 years. The chances are high that he will suggest equity MF's as the best option.

Now ask him what are the best option if you want to invest for less than 5 years. The chances of him suggesting equity MF's now will be much lower.

But this is a common concern for many people. People these days don’t have 5 years to wait. They cannot invest for such a long time. So what are the best options for someone who needs his money back, with decent returns in less than 5 years?

The answer to this question will depend on the time that this person can wait. So assuming that the deadline can be anywhere between 3 months and 5 years, let’s explore the available options.

For less than 3 months

Generally for less than 3 months, people prefer keeping money in savings account. But there is an option which can give better post-tax returns. This option is Liquid Funds. These funds primarily invest in money markets, treasury bills, and certificate of deposits and commercial paper of high credit ratings. These are quite low risk instruments. These funds do not have exit loads.

For 3 months to 1 year

If you need money after say 3 months but before 12 months, then you can look at Ultra Short Term funds. Even though these funds are more volatile than liquid funds, they have the potential to generate better returns. But another point to note is that these funds have exit loads.

For 1 year to 5 years

For a duration of 1 year to 5 years, Income funds can be looked at upon. These funds give higher returns than Liquid Funds. But these also tend to be quite volatile and invest in a combination of bonds, commercial paper, gilts, corporate bonds, etc. Also remember that even though these funds have exit loads, these loads are still lower than the premature withdrawal penalty of the banks.

Another option for this time period can be FMP or Fixed Maturity Plans. These are similar to fixed deposits where the money is invested in fixed income instruments with good rating and are more tax efficient than FDs due to indexation benefit.

Monthly Income Plans can be another option for someone looking to invest for less than 5 years. These funds have equity exposure of about 20% and have the potential to deliver higher inflation adjusted returns. So if the volatility and risk associated with equity component of these MIPs is fine with you, then you can look at this as a good choice to park your money for less than 5 years.

One important point to note here is that all debt funds provide indexation benefits if held for more than 3 years. This means that your profit will only be taxed when you earn something above the inflation rate.

So now the first thing which you need to decide is the exact time duration for which you want to park your money. Once that is done, you can choose from any of the above discussed options to invest your money.