Which mutual fund is best to invest in lieu of fixed deposits

The most optimal solution will depend upon the flexibility of your goal time line. If cannot be flexible about your goal time-line then, you should go with the lowest risk option with reasonable yields. Short term debt funds (not ultra-short term debt funds) or dynamic bond funds are good options. Current three year Government bond yields are around 6.5%. With some rate reductions expected over the next 12 – 15 months short term debt funds and dynamic bond funds can meet your returns expectations on a pre-tax basis. With three year investment tenure you can avail of indexation benefits. It is not possible to predict how much indexation benefit you will get, but since you in 30% tax bracket, the long term capital gains tax will be considerably lower than your income tax rate.

Arbitrage funds are currently giving around less than 7% annualized returns. It is difficult to predict with any degree of confidence, if they will be able to meet your return expectation.

If you can be a little flexible with your goal time line, then equity savings funds can be good investment options. As you have noted the active equity exposure is around 30 – 40%; so the risk is considerably lower than equity funds or aggressive hybrid funds. The active equity portion can give excellent returns over a three year investment horizon, over the above the yield from the debt and arbitrage portions. However, you should also be prepared for market downturns. If your investment gets hit by equity market downturn towards the end of your investment tenure, you should be prepared to hold on to the investment till the market recovers (usually it takes 12 to 15 months for the market to recover from a bear market bottom).

At any point in time to select the top performing funds from any category do check this section on our website

Hope you find our suggestions useful.