Which mutual funds are suitable for one or two year investment?

I had joined a company one month back as an analyst and recently I have received my first ever salary and wish to invest the same. I am able to save Rs. 5,000 every month. I wish to invest in equity mutual funds. I want to save this money for two years. In which mutual fund should I invest in? Please advise.

Since the investment time horizon is one year it is not advisable to invest in equity mutual funds. Minimum time horizon for investment in equity should be five years.

Even in the debt category it would be advisable to stay away from medium-term bonds, long-term bonds and dynamic bond funds as these funds invest in securities or instruments whose Macaulay Duration is more than three years. To know more about the debt fund categories and Macaulay Duration refer to our previous articles.

As it is assumed that you have a shorter investment time horizon and you will withdraw in two years, mutual funds which invest in money-market securities or instruments and whose Macaulay Duration is less than three years can be a good option. These kind of mutual funds are less affected by interest rate sensitivity.

Also one thing you need to understand is that how you would be getting taxed. As you said you wish to withdraw the investment after two years, your investment would be considered as short-term and would be subject to STCG (Short Term Capital Gains) tax. As far as debt funds are concerned, the short-term gain that you have earned would be added to your income and would be taxed as per the income tax slab rate. But in case you invest for an extra year i.e. for three years, your gain would be considered as LTCG (Long Term Capital Gain) and you would be taxed 20 per cent with indexation benefit which effectively is a better option.