I would like to invest Rs 2,000 in mutual funds for three years. I am a new investor and kind of confused about which funds to invest. I can take low or moderate risk and my goal is to create a fund for my wedding. Please guide.
-Valencia Rebeiro

We are assuming that you are planning to invest Rs 2,000 every month via SIP. An SIP is a method employed to invest a fixed sum regularly in a mutual fund scheme, typically equity mutual fund scheme. However, since you are investing for only three years, you should not invest in equity mutual funds. You should stick to safer investment options like bank deposits and debt mutual funds. When you are investing for a shorter period like three years, your priority should be to safeguard the capital, not chasing extra returns. This is because if you lose money due to a sudden downturn in the market, you would not be able to recoup your losses because of your short investment period. You should invest in equity mutual funds only if you have an investment horizon of five to seven years.

Though debt mutual funds have the potential to offer marginally higher market-linked returns, you are unlikely to gain a lot since you are investing a modest sum every month. However, if you can hold it for a little more than three years, you would get better post-tax returns. Debt mutual funds held over three years are taxed at 20 per cent with indexation benefit. The indexation helps investors to bring down taxes. If the investment horizon is less than three years, both bank deposits and debt mutual funds are taxed the same manner. The returns are added to the income and taxed according to the income tax slab applicable to the investor.

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