Take the lump sum route in ELSS if you need your money in three years

Market-linked instruments such as equity mutual funds are volatile and require time to grow in value.

I earn about ₹75,000 a month, out of which I want to invest ₹40,000 in mutual funds. I have two goals—to have ₹20 lakh in two to three years and to invest for long-term growth and saving. Please suggest the right mutual funds. I’m inclined towards equity-linked saving schemes (ELSS).

Market-linked instruments such as equity mutual funds are volatile and require time to grow in value. (Photo: iStock)

—Aishwarya Barjatya

While your high rate of savings is laudable, I would advise you to moderate your expectations from mutual fund investments. Market-linked instruments such as equity mutual funds are volatile and require time to grow in value. A time frame of two to three years does not yield itself to a high-risk or even a moderate-risk portfolio.

To get to a ₹20 lakh corpus in two to three years, you can expect to invest in a portfolio heavy on debt funds, which would yield between 6-8% returns annually. That means, you would need to invest about ₹50,000 a month over 36 months to reach your target. At best, you can expose about 10-15% of your portfolio to equity funds and you would need to leave the remaining in debt funds in categories such as short-term or ultra short-term funds.

ELSS funds can be considered, but if you need your money in three years, you can only invest now (in a one-time fashion) and not as an SIP since ELSS investments are locked for 3 years since the date of (each) investment. So, for your investment goal, ELSS funds might not be a right fit.

Srikanth Meenakshi is co-founder and former chief operating officer, FundsIndia.com.