The stock market is pretty volatile right now, financial analysts don't really recommend real estate and gold prices are on a high. In such a situation where should the retail investor park his money.

Let us consider the following examples:

P F Mani is a 50-year-old executive working in a multinational firm. He has recently received a bonus of Rs 500,000 which he plans to use for his daughter's wedding next year. So where should Mani invest his money?

Typically, for risk-averse investors like Mani, most financial planners recommend safe investment options such as PPF, NSC, Kisan Vikas Patras, etc.

However, all these instruments have long lock-in periods in excess of one year and, therefore, cannot be considered in the short run.

"Since he is a low-risk investor we will advice him to invest at least 70 per cent of his portfolio in liquid funds," says Abhilash Maheshwari of SureFin Investments, a Gurgaon-based portfolio management service company.

Liquid funds are currently giving annualised returns of 4.5 per cent to 4.75 per cent. They are better than bank fixed deposits as there is more liquidity. In case of a bank FD, you lose some interest if you break it before maturity. Also, liquid funds are more tax-efficient.

"We recommend the dividend option to taxpayers in the 20 per cent-plus tax category as here they would only lose 12.5 per cent as dividend tax," says Sanjiv Bajaj of Bajaj Capital.

Agrees Rohit Sarin of Client Associates, "If the money is definitely required after one year then we would advise all investors to invest in debt only as 12 months is too short a period for equity investing even for a high risk investor."

SureFin's Maheshwari feels Mani should put the remaining 30 per cent in Fixed Maturity Plans of mutual funds. These are close-ended debt funds where the maturity of the underlying securities coincides with the maturity of the plan.

Hence the yield of the security becomes the return to the investor at the end of the plan period. A one-year FMP is currently giving annualised returns of between 5.5 per cent to 6 per cent.

However, there is limited liquidity in case of FMPs as withdrawal before maturity results in a 2 per cent to 3 per cent penalty. Bajaj recommends the dividend option of FMPs as the first choice in short-term investments for individuals in the high tax category.

But should Mani put his money in these instruments and then forget about it for the next one year?

"We would like to move the funds from liquid to arbitrage opportunities in both equity and commodity derivatives markets to increase the effective return to the client from 4.5 per cent (being earned in liquid funds) to say 8 per cent," says Surefin's Maheshwari.

"These arbitrage opportunities are few and infrequent but when the opportunity arises we would definitely like to take advantage of the same," says Maheshwari.

Arbitrage is the simultaneous purchase and selling of a security or commodity in order to profit from a differential in the price. This usually takes place on different exchanges or marketplaces and is also known as a riskless profit.

Bajaj also recommends the post office savings bank one-year time deposit scheme that offers a return of 6.25 per cent.

"Although the returns are taxable they are still pretty high and 100 per cent safe," says Bajaj. He feels one can also look at bank fixed deposits in the short run.

"Near the end of the quarter, to make up their deposit targets, banks start offering better returns. You may get a good deal," says Bajaj.

In the second example, let's suppose that Mani decides to use the bonus for a world cruise next year. Where should he park his money in the short run?

"Mani is now an average-risk investor and, therefore, we would recommend his putting only 30 per cent to 40 per cent in liquid funds, which will subsequently be used to capture arbitrage opportunities in the derivatives market and the remaining in direct stock holding in such stocks which we consider value buys," says SureFin's Maheshwari.

SureFin constantly researches stocks that are value rich but their true value is not reflected in their stock prices as they are not current market favourites. These they consider value stocks.

"These stocks realise their true value in a time span of not less than six months, i.e. whenever an unlocking event takes place. It includes investing in special situations like mergers, restructuring, and other value unleashing events," says SureFin's Maheshwari.