I recommend to invest in Liquid Mutual Fund (Direct plans) as current 10 year Govt Bond yield is low at 6.7%. I believe that the bond yield will increase over the next 1-2 years. Switch to Debt Gilt Mutual Fund (Direct Plan) when the bond yield increases to 8-8.5%. One can easily get 6-7% return which is higher than the current FDs returns.
Debt (Liquid) Mutual Fund - Direct Plans
(Investment in the largest 100 stocks)
Franklin India Liquid Fund
Mahindra Liquid Fund
Edelweiss Liquid Fund
BNP Paribas Liquid Fund
Nippon India Liquid Fund