Best Investments for Medium Term in India

Best Investments for Mid-Term Goals

If you’re looking to invest with a time horizon of one year to five years, your best options are those that give you a little more upside. That means taking on a bit more risk in some cases, but you’ve got to give some to get some.

From saving for a house down payment or a new car to a home renovation project you’re itching to bring to life, the investment products below are a solid way to provide reasonable room for growth on your funds in a taxable investment account—subject to market conditions.

Medium-term goals are those goals that are 3-5 years away, which can be saving for your wedding, a downpayment on a house, house renovation, etc. It includes investment options that can beat inflation by a decent margin with less volatility. Here are some of the best investment options in India for the short term: 

National Savings Certificates (NSC)

National Savings Certificate or NSC is a post office savings product backed by the government of India. It works like a 5-year FD. It offers you guaranteed interest, but the entire amount is payable only at maturity.

• Availability: You can invest in NSC through the post office only. 
• Investment Amount:  The minimum investment amount is Rs 1,000, with no upper limit. 
• Maturity: It matures in 5 years.
• Taxation & Benefits: Eligible for deduction under Section 80C upto Rs 1.5 lakh. Interest earned for 4 years is eligible for deduction, as it is reinvested; however, total interest earned at maturity is taxable as per your income slab. 
• Risk Level: Risk-free investment
• Who Can Invest: Suitable for investors looking to earn government-guaranteed returns and tax savings.
• Returns Offered: Offers guaranteed return of 7.7% compounded annually.

Post Office Time Deposit

Like banks, post offices also offer FDs. Known as National Savings Time Deposit, these investment options allow you to deposit your money for short-medium time periods. The advantage of National Savings Time Deposit is that they offer better returns than banks.

• Availability: You can invest through your nearest post office. 
• Investment Amount: The minimum investment is Rs 1000, and there is no limit on the maximum amount. 
• Maturity: You can choose a maturity period from 1 year to a maximum of upto 5 years. 
• Taxation & Benefits: Five-year time deposit is eligible for deduction under Section 80C upto Rs 1.5 lakh. Interest earned in Post Office FD is taxable as per your income tax slab.
• Risk Level: Low-risk investment
• Who Can Invest: Suitable for risk-averse investors looking to earn guaranteed returns like bank fixed deposits. 
• Returns Offered: You can earn a return in between 6.9% and 7.5%, depending on your investment tenure. 

Debt Funds for Medium Term

There are three Debt Mutual Fund categories that hit the sweet spot between risk and return for a medium-term goal. These three Debt Mutual Fund categories are Banking & PSU Funds, Corporate Bond Funds, and Short Duration Funds. 

• Availability: You can invest through the ET Money App or website. It offers you a hassle-free process with zero commission. 
• Investment Amount: You can invest through Systematic Investment Plans (SIP) or lumpsum mode. Most funds typically have a minimum investment starting at Rs 500 or even lower, with no maximum limit.
• Maturity: Debt funds do not have a lock-in period, allowing you to redeem your investments anytime.
• Taxation & Benefits: Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) are subject to taxation as per your income slab.
• Risk Level: Low to Medium Risk
• Who Can Invest: Suitable for investors who want to preserve their capital and also want to earn higher returns than bank FDs. 
• Returns Offered: Offers market-linked returns.

Hybrid Funds

These types of mutual funds invest in more than one asset class. The most popular combination of asset classes these funds use is Equity and Debt. But some Hybrid Funds also invest in Gold or even Real estate. The advantage of these funds is that you can enjoy the growth potential of equity and the stability of debt in a single fund. 

• Availability: You can invest in hybrid funds through ET Money. We offer you a hassle-free process, and you can directly invest with zero commission. 
• Investment Amount: Most funds typically have a minimum investment starting at Rs 500 or even lower, with no maximum limit. 
• Maturity: There is no mandatory lock-in period. You can redeem your investment anytime. 
• Taxation & Benefits: LTCG and STCG earned on the hybrid funds are taxable on the basis of their orientation.
  • In the case of debt-oriented hybrid funds, LTCG and STCG are taxable as per your slab rates. 
  • In the case of equity-oriented hybrid funds, STCG is taxable at 15% plus cess, while LTCG is taxable at 10% plus cess if the total gain exceeds Rs 1 lakh.  
• Risk Level: Low to Medium Risk
• Who Can Invest:  Suitable for a wide range of investors, including beginners, those with medium-term goals, retirees seeking regular income, and individuals looking for asset allocation solutions.
• Returns Offered: Offers market-linked returns.

Short-Term Bond Funds

• Average annual yield: 6% to 8%
• Advantages: Higher returns than bank deposit products, potential tax-free income on certain funds, highly liquid
• Disadvantages: Fund screening and selection can be cumbersome

If you’re comfortable with slightly more risk than you get with bank deposits, check out short-term bond funds. Available as either exchange-traded funds (ETFs) or mutual funds, these diversified bond funds historically offer better yields than most savings accounts, making them ideal for money you’ll need in the medium term.

Unlike bank deposits, bonds are not federally insured, meaning you can lose money you invest, especially if you aren’t careful when selecting funds. To minimize risk, choose funds featuring high-quality, investment-grade corporate and government bonds. Be sure to compare both returns and expense ratios when deciding between funds.

You might also want to speak to a financial advisor or tax professional to see if there are bond funds that can help limit your tax liability, like some municipal bond funds.

A Diversified Index Fund Portfolio

• Average annual return: A portfolio with 20% or 30% stocks and 70% or 80% bonds averaged annual returns of about 12%.
• Advantages: Good liquidity, more exposure to stocks may provide more upside
• Disadvantages: You can lose principal in a down market; fFund screening, selection, rebalancing and tracking can be cumbersome

A medium-term time frame allows you to consider the possibility putting money into a mix of stock index funds in addition to bonds, which can enhance your returns. Equity index funds can hold hundreds or even thousands of individual stocks, as they aim to mimic the performance of a particular index.

While they’ve historically offered solid long-term returns, stocks do come with the potential for negative returns. That said, in Vanguard’s modeling, portfolios with 20% to 30% stock holdings had negative returns roughly the same amount those with 100% bond holdings did.

If you choose to invest in a portfolio of investments, keep in mind that you’ll need to do some research to make sure your funds have reasonable returns and performances. If you like the idea of investing in low-cost index funds but don’t want the hassle of managing the accounts or research yourself, consider a robo-advisor that will handle the task for you, in exchange for an annual management fee.