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Parking money for two years in mutual funds

If you are looking for assured returns with absolute safety of capital, you should stick to bank deposits

I am a retired person. I want to park some part of my retirement corpus in mutual funds for one or two years with complete safety. I should be able to redeem the money at short notice. Please tell me what kind of return will I get in a year and what will be my tax liability?
- PK Saran

To begin with, mutual funds do not guarantee returns. So, if you are looking for guaranteed returns with absolute safety of capital, you should stick to bank deposits. If you are willing to take a little extra risk, you can consider investing in arbitrage funds and debt mutual funds. Since you have a short-term horizon of one or two years and do not want much risk, these are your only mutual fund options.

You should consider investing in ultra short-term schemes if you are investing only for a year. If you are investing for two years or more, you can consider dynamic debt funds. Please remember that debt mutual funds offer the best post-tax returns if you stay invested for more than three years. If you sell your debt mutual funds after three years, they qualify for long-term capital gains tax of 20 per cent with the indexation benefit. If you sell your debt mutual fund investments before three years, you will have to pay a short-term gains tax as per the Income Tax slab applicable to you.

You can also consider investing in arbitrage funds for better post-tax returns. Arbitrage funds look for the price difference between the cash and the derivative market to generate returns. Though arbitrage funds do not invest directly in stocks, they are classified as equity schemes for the purpose of taxation. This favourable taxation give them an edge over debt funds. If arbitrage funds are sold before a year, the short-term gains are taxed at 15 per cent. If these funds are sold after a year, investors do not have to pay any tax as long-term capital gains tax is nil on equity funds.

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