Choose FD, investments with fixed returns for short term

Here is the edited transcript of the interview on CNBC-TV18.

Q: The caller would like to invest Rs 5 lakh lumpsum, how should he allocate his money? His time period is 5 years and the goal is 20 lakhs. Basically his goal in terms of eventual investment is his child's education, what would you recommend?

A: Since the caller wishes to accumulate a corpus of Rs 20 lakh in 5 years and is ready to set aside an amount of Rs 5 lakh lumpsum, he needs 32% annualised return for the Rs 5 lakh to become Rs 20 lakh to generate that kind of returns. It is certainly not a good idea to think that you can even expect that from any investment because this will lead him to take some uncalculated risk and probably go wrong with his investment decision.

I recommend him not to take risk with this Rs 5 lakh because he needs it after 5 years for his child’s education. I would recommend him to park this money in a bank fixed deposit or if he is comfortable with non-convertible debentures listed on stock exchanges, he can invest into those where he will get fixed returns and is going to be less risky.

There is surely going to be a shortfall in what he requires. When I do see that he has certain investments made, in which he contributes about Rs 1 lakh per annum into tax saving mutual funds, the caller could start redeeming that corpus when he needs it and use it for his child’s education.

But, for that also he needs to stop investing in SIPs from today. Whatever investments you make in the equity-linked saving schemes (ELSS) and Systematic Investment Plan (SIP) gets locked for three years from the time you make the investment. So if the caller requires five years from now, he must stop investing in ELSS and SIPs.

He can choose any of the regular open ended schemes, but he may not get tax benefits under 80C. He just needs to take a prudent call on this kind of an option, whether he wants tax benefits or he needs the funds for his child.