In which mutual fund should I invest for long term returns

If we have understood your question correctly you have two requirements. (1) You need monthly income from your investment for the next three years and (2) tax efficient income over a 3+ year investment horizon (through SWP).

For the first requirement you should invest in short term debt funds. These funds can give better yields than FDs of similar tenure and at the same time, have limited sensitivity to interest rate changes. Many short term debt funds have monthly dividend options. However, depending on your tax rate, you can opt for SWP also in the short term. Though dividends are tax free in the hands of the investors, debt funds have to pay dividend distribution tax (DDT) at the rate of around 28.8% before paying dividends to investors.

If you are in the highest tax bracket then, dividend option will be more attractive because DDT will be lower than your income tax rate. However, if you are in the lower tax brackets (20% or below) then SWP from growth option will be more tax efficient from monthly dividends. You should decide which one will be the better option for you. Please see top most consistent short term debt funds in our tool Top 10 Mutual Funds in India – Short Term Debt Funds.

For your longer term investment, you can select long term debt funds or income funds. These funds are subject to interest rate risks, but over a longer time frame are likely to give better returns than short term debt funds. Please see top most consistent income funds in our tool Top 10 Mutual Funds in India – Income Funds.

Depending on your risk appetite you may also want to consider investing in Debt Oriented Hybrid funds. These funds have 5 to 25% equity exposure, but over a long investment horizon, they can beat inflation and generate good returns. Please see top most consistent debt oriented hybrid funds in our tool Top 10 Mutual Funds in India – Hybrid Debt Oriented Funds.

Hope you find our suggestions useful.