Explore these investment options to buy a house
Let's imagine a scenario where you want to buy a house in two years and need to save around Rs 20 lakh for the down payment. For the money you require in the short-term (less than three to five years), you should avoid investing in equity-oriented investment avenues owing to the volatile nature of the equity markets. You should rather look to invest in some short-duration debt funds. These funds invest in securities having a duration of up to three years and hence are less affected by the interest rate movements as compared to those debt funds having longer maturity profile. You can also look to invest in ultra-short duration funds which have even smaller maturity profile.
Debt funds generally give you better post-tax returns over the traditional savings account or fixed deposits. If you stay invested for less than three years, then the gains are added to your overall income and taxed as per your tax slab. For a holding period of more than three years, these funds are taxed at the rate of 20 per cent after indexation.
However, while choosing these funds one must keep in mind certain factors. Firstly, look at the credit quality of the portfolio. Funds investing in lower-rated securities may be taking undue risk for earning higher returns. However, remember that these categories of funds are meant for capital preservation and not to deliver high returns to you on your investments. Hence chasing high returns can lead you to invest into riskier avenues.
Also, if this investment tenure is tentative and you won't mind extending it by a year or two, then you can also consider investing in equity savings funds. These funds invest about one-third of their assets in equity, debt and arbitrage each. Arbitrage positions are considered equity for taxation but behave like debt on risk and returns. So effectively, an investor gets 65 per cent debt and 35 per cent equity portfolio but it is taxed like equity. If the holding period is more than one year, gains beyond Rs 1 lakh from equity-oriented funds are taxed at 10 per cent. If the holding period is one year or less, the gains are taxed at 15 per cent.
While the equity component generates inflation-beating returns, the debt and arbitrage portfolios provide steady income and prevent massive value erosion when equity markets crash. These funds will help you earn better post-tax returns than debt funds but would be slightly more volatile. On the other hand, they would be less volatile than pure equity funds and would give less returns in comparison.
So decide on the duration and take a call accordingly. Wondering which are the best funds within the chosen category? Check out the list of funds hand-picked by our analysts.
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