How To Invest In Mutual Funds To Buy A Car In 2 Years?

Purchasing a car could be the second biggest expense you make besides a house. While you can fund the purchase with a vehicle loan, the cheapest way to buy a car would to make complete or part payment with your savings.

A car loan will come with interest burden and the burden of changing emission norms that will depreciate your vehicle's resale value cannot be disregarded.

Starting 1 April 2020, all four-wheeler makers in India have been mandated to manufacture, sell and register solely BS6 (BSVI) vehicles by the government. New models of electric vehicles are also being launched or manufactured.

In the current market scenario of changing emission norms, it would not hurt to wait and save for 2 years before you purchase a car for yourself.

If you apply a disciplined and efficient strategy to set aside some amount each month towards saving for a car purchase, you can definitely buy one with cash and no interest burden.

1. Short Term Debt Funds

Allocate 80 to 90 percent of your surplus earnings in a month towards a short-term debt fund. These are mutual funds invest in debt, bonds and government securities, which are less riskier than equity and better than bank deposits (in the currently falling RD/FD rates scenario) to invest money for 1-3 year period.

Here are 5 short term debt funds that gave the highest returns on 2-year SIPs

Scheme Name	2-year returns	1-year returns	3-year returns
HDFC Short Term Debt Fund- Growth	10.71%	5.98%	14.60%
Axis Short Term Fund - Growth	10.46%	5.80%	14.03%
IDFC Bond Fund - Short Term- Growth	10.42%	5.54%	14.02%
ICICI Prudential Short Term Fund - Growth	10.38%	5.85%	13.75%
Kotak Bond Short Term Plan- Growth	10.32%	5.60%	13.76%

The returns data is as on 14 February 2020. So, if you were to transfer Rs 25,000 per month on a SIP (systematic investment plan) with any of the above short term debt mutual funds exactly two years ago (14 February 2018), your investment of Rs 6 lakh (25,000 x 24 months) could have grown to Rs 6.63-6.65 lakh.

2. Multi-cap equity mutual funds

The rest of your surplus earnings for the month (10 to 15 percent) can be allocated towards multi-cap equity mutual funds. The returns from equity funds are highly volatile in a timeframe as short as 1 to 2 years, which is why you should make a smaller investment towards them and in multi-cap funds.

Multicap funds put money on varied stocks across the market to diversify investment and balance risk. While small and midcaps are high risk- high return stocks, their risk is balanced by allocating some funds towards large caps.

Here are the 4 multi-cap equity funds that gave the highest returns on 2-year SIPs

Scheme Name	2-year returns	1-year returns	3-year returns
DSP Equity Fund- Growth	19.73%	16.40%	23.18%
Axis Multicap Fund- Growth	19.70%	13.96%	-
Canara Robeco Equity Diversified-Growth	16.09%	12.50%	21.49%
UTI Equity Fund- Growth	15.81%	13.88%	21.70%

The returns data is also as on 14 February 2020. So, if you were to transfer Rs 5,000 per month on a SIP (systematic investment plan) with any of the above multi-cap equity mutual funds exactly two years ago (14 February 2018), your investment of Rs 1.2 lakh (5,000 x 24 months) could have grown to Rs 1.4-1.5 lakh.

Investment Strategy

You can increase or decrease the time frame as well as the amount for investment based when you want to purchase the car and how much it could cost. However, place a larger portion of your savings in debt funds to avoid losing money from market volatility.

The 1 and 3-year data has been provided for comparison.

Note: Mutual fund investments are subject to market risks and may not replicate results seen in the last 1 to 3 years.

Disclaimer
The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.

About the author
Olga Robert has been covering equity markets and personal finance for over two years.