User Question: I have 5Lakh and want to invest for better than FD returns in 2 years

Planning to purchase a flat in a year or two and I have accumulated money for down payment and am very confused where can I invest it now for better than FD returns.

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I got a very interesting question from one of my readers, which is.

Hi Shabbir,

I am planning to purchase a flat in a year or two and I have accumulated money for down payment. I have already accumulated 5 lakhs and am very confused where can I invest it now for better than FD returns.

If you want to ask me anything, just drop an email with your question here.

This question is quite interesting because it is one of those question that you may have when you are planning to buy anything bigger than what you earn per month like property, car or go for furniture or interior decoration for you home because you have to start accumulating before you can make an actual purchase.

Normally with car or furniture the same kind of question does not come into our mind because the amount we may need to accumulate is quite small. For car we may need to accumulate funds for few months for down payment and then opt for an auto loan but if we want to be making the complete payment for the car it may be one of the question.

Similarly for interiors and furniture we tend to be doing it in small tranches and so don’t realize that it is also a big cost. We just tend not to plan for it or just make it in the daily process only.

So I will suggest you how you can we use the investment for such big ticket purchase and how you can go about it. What is ideal way of doing it and what is more practical approach to be doing it.

Ideal Approach

Coming to the question like I have X lakhs which I may need couple of years down the line looks really good but if we look at the complete picture it cannot happen that you get those X lakhs in a single day or in any single week or even in any single month. Ideally you started accumulating the money or it could be that your expense is not as much as you are making and so slowly but surely your amount started to accumulate in your bank account.

In either case you needed a time frame to accumulate the amount.

So if you just started the thought process of investing when the amount started accumulating, you may have 1 or 2 years more for your investment to flourish and question of investment is completely different like:

I have 1L and I am saving 30k per month, I may need the amount in 4 years from now and where can I invest the same.

This is when the answer is quite simple like make a SIP in a mutual fund for accumulation and the investment has ample time to give better than average returns from equity.

Practical Approach

Normally it is quite difficult to follow an ideal path because that is not how we tend to be financially aware about everything we should be doing. On top of that we tend to be lazy for our investments and there is nothing wrong in it. That is how everyone is and that is how even I am.

Once the amount becomes considerable, we tend to give it a thought like something can be done with this amount to make it even better amount once we need it. Also if you look at the question, you realize that the reader haven’t asked anything about the future savings he would be doing and this is quite normal because we are fine once we have second chunk of considerable amount, we may again think about investing it.

I am sure many will agree that there are lot of better options for the reader but then we don’t realize that scenario could have been lot worse either and it is quite normal for many as well. In fact I am glad that you asked this question before investing and not after like I am stuck with so and so thing and I am fine to remain invested for 1 to 2 years and can I get my capital back. Normally this is scenario of many as well.

So nothing to think that you have done something wrong and it is quite normal.

The Investment

Lot has been said like what could have been done and what should be done but the question is what can be done and so here you go.

What I would do is go about Pareto Principle of 80 20 rule. As the term is quite short (only 1 to 2 years) and so I will invest 80 % of my money in a FD or debt or liquid funds and 20% of my money into equity and equity oriented funds so it can help protect my capital whenever I need as well provide me an opportunity for better than FD returns.

So let me tell you how your capital is protected.

4L you put in FD at 9% per annum and for calculations sake you have 2 years of time frame and so it means you will roughly make ~36k in first year and ~40k in second year and so roughly gain of ~76k. We are not going into quarterly computations but that’s ok as it is just a rough calculations

Which means your investment of 4L will be 4.75L+ after 2 years.

So the equity investment of 1L, even if it performed negatively 25% each year, you will only loose 50k and so making your capital safe after 2 years.

And if market gives you returns of 15% again in next couple of years, you can easily make 30k on your investment of 1L and so it will make your corpus go beyond 6L.

As you are looking for maximum returns, I think this is the best option to opt for.

Conclusion

SIP investment is always preferred when you are starting to accumulate the fund for a big-ticket purchase but then it is better late than never and so invests smartly and invests early as and when you can.

Share your views in and feedback in comments and if you have any other investment suggestions, share them in comments below.