Buying a Home: How to Save ₹10 Lakh in 2 Years for Down Payment by MF Investing

– Name withheld

(Question answered by Naveen Kukreja, CEO and Co-Founder of Paisabazaar.com)

Equity as an asset class can be very volatile in the short term, even though it may outperform fixed income instruments by a wide margin over the long term. Hence, I would advise you against investing in equity mutual funds for financial goals maturing within 5 years, especially when equity markets are still in overvalued territory.

Instead, I suggest you open fixed deposits with scheduled banks that offer FD interest rates of 6-6.50% p.a and above, to build a home loan down payment corpus. Some of the scheduled banks offering interest rates of 6% per annum and above for FD tenure of 1-2 years tenure include SBM Bank, Utkarsh Bank, Jana Bank, Suryoday Bank, Ujjivan Bank and ESAF Bank. Being scheduled banks, each of these banks are covered under the deposit insurance program up to 5 lakh for each depositor in case of failure of the bank. So, try to spread your FD across at least two of these banks to ensure the maximum level of capital protection.

Invest in direct schemes of short duration debt funds through SIPs. If your position is not offered by any of these banks or the interest rate for your required FD tenure is less than 6% p.a., you can opt for these short duration debt funds. One can consider the direct schemes of funds – HDFC Short Term Fund and ICICI Prudential Short Term Fund. The low maturity profile of these debt funds allows them to offer higher returns during a rising interest rate regime as compared to debt fund categories with longer maturity profiles.

If you have a high risk appetite, you can consider splitting your monthly contribution equally between a conservative hybrid fund and a fixed deposit of more than 6% p.a. The remainder in fixed income securities. The presence of equities in the portfolio allows them to generate higher returns than debt funds and fixed deposits.