Investing in the best liquid funds has become a preferred choice for many Indian investors looking for safety, liquidity, and decent returns. Whether you are a salaried individual or a seasoned investor, liquid funds offer a great alternative to traditional savings accounts and fixed deposits. However, one question that often arises is whether to invest via Systematic Investment Plan (SIP) or lumpsum. This article delves deep into the mechanisms, benefits, and drawbacks of both modes of investment in liquid funds while also touching upon the relevance of mid cap funds in your broader investment portfolio.
Overview of the best liquid funds
Liquid funds are a category of debt mutual funds that primarily invest in short-term instruments like treasury bills, commercial papers, and certificates of deposit with maturities up to 91 days. The main objective of these funds is to provide high liquidity and safety of capital with moderate returns, usually higher than traditional savings bank accounts. Given their composition, best liquid funds have minimal interest rate risk, making them an ideal parking space for idle money or emergency funds.
In India, where interest rates fluctuate frequently and inflation often eats into fixed deposit returns, liquid funds come across as a practical and effective tool for capital preservation combined with reasonable returns. They are particularly popular among investors seeking quick access to their money while earning better returns than a savings account.
Investing in liquid funds via SIP
Systematic Investment Plan (SIP) in liquid funds involves investing a fixed amount regularly, usually monthly, in these funds instead of putting in a lumpsum amount at once. SIP is a disciplined and convenient approach which helps investors take advantage of rupee cost averaging.
One of the standout benefits of SIPs is that they reduce the risk of market timing because you buy units at different price points. Liquid funds typically have comparatively stable Net Asset Values (NAVs) due to their short-term instruments, but SIP still offers the benefit of steady investment without the pressure of choosing the ‘best time’ to invest.
For an Indian investor, SIPs in best liquid funds are ideal for those who want to regularly park surplus cash while maintaining liquidity for sudden needs. Additionally, SIPs inculcate a disciplined savings habit which is essential for wealth creation over the long term.
Investing in liquid funds via lumpsum
Lumpsum investing involves investing a large amount in liquid funds at one go. Investors prefer this mode when they receive a bonus, inheritance, or any other sudden influx of funds. Given the stable nature of liquid funds, lumpsum investment can help to grow your emergency corpus without much risk.
In the Indian context, lumpsum investment makes sense when interest rates are favourable, or when alternative saving avenues are less attractive. The ability to redeem funds instantly without exit load also makes lumpsum investment in liquid funds very convenient.
However, lumpsum investing demands market timing instincts. Though liquid funds are less volatile, the returns can vary when interest rates change, impacting short-term yields. Investors need to track economic indicators like RBI policy rates, inflation trends, and short-term bond yields to make an informed lumpsum investment decision.
Comparing SIP and lumpsum in liquid funds
When it comes to the best liquid funds, choosing between SIP and lumpsum depends largely on your cash flows and financial goals. If you have regular surplus income, SIP can help you build a consistent safety net with incremental investments. Conversely, if you have a big chunk of money that you do not need immediately, lumpsum investing in liquid funds can generate optimal returns on idle cash.
One advantage of SIPs is rupee cost averaging and reduced risk, whereas lumpsum may offer the benefit of investing at a single point if the timing is right. However, since liquid funds are relatively stable with low volatility, the difference between SIP and lumpsum returns is often marginal compared to equity funds or mid cap funds.
For investors balancing risk and liquidity, liquid funds via SIP or lumpsum can complement mid cap funds (which are more volatile and growth-oriented). This mix ensures a well-rounded portfolio catering to both growth and safety.
Why include mid cap funds in your investment portfolio
Mid cap funds are equity funds investing primarily in companies with medium market capitalisation, generally ranging between Rs. 5,000 crore to Rs. 20,000 crore. Such companies often have more growth potential than large caps but with relatively higher risk.
Including mid cap funds in your investment mix offers opportunities for wealth creation over a medium to long-term horizon, especially as the Indian economy grows and expands. Investors looking for higher returns addition to their liquid funds often opt for mid cap funds as they strike a balance between aggressive large caps and high-risk small caps.
Moreover, mid cap funds historically have outperformed large cap funds during economic upturns, but they also come with increased volatility, making it essential to balance your portfolio with safer instruments like best liquid funds. Thus, combining liquid funds with mid cap funds can offer both liquidity and growth prospects—a smart investment strategy for Indian investors.
Taxation benefits of investing in liquid and mid cap funds
Understanding the tax implications of your investments is crucial for maximizing post-tax returns. Liquid funds are classified as debt funds for taxation purposes. If held for less than three years, gains are taxed as per your slab rate under short-term capital gains (STCG). If held for more than three years, gains are taxed at 20% with indexation benefits.
Mid cap funds, classified as equity funds, enjoy favourable tax treatment. Gains from equity funds held for more than one year attract long-term capital gains (LTCG) tax of 10% on gains above Rs. 1 lakh annually, which is beneficial compared to debt funds. Short-term capital gains from mid cap funds held for less than one year are taxed at 15%.
This tax differential makes mid cap funds more attractive for long-term wealth creation, while liquid funds remain ideal for short-term liquidity with moderate tax efficiency. Investors should factor in these tax benefits while deciding their asset allocation between liquid and mid cap funds.
How to choose the best liquid funds in India
Selecting the right liquid fund requires analysing multiple parameters such as past performance, fund manager expertise, expense ratio, and credit quality of the underlying assets. For Indian investors, it is advisable to prefer funds with a consistent track record of generating returns above savings bank accounts yet maintaining low volatility.
Key points to check include the Average Maturity (AM) of underlying securities, credit rating exposure (preferably high-rated), and the fund’s asset size. Larger funds managed by reputed asset management companies typically offer more stability and transparency.
Some of the best liquid funds in India, such as those from HDFC, ICICI Prudential, or Axis Mutual Fund, are known for optimal risk management and competitive returns. Investors interested can compare these funds via platforms like Moneycontrol or Value Research Online to make a well-informed decision.
Monitoring and redeeming your liquid fund investment
One advantage of liquid funds is quick redemptions, usually within 24 hours, making them ideal for emergency funds or sudden liquidity requirements. Investors should, however, keep track of changes in interest rates or credit quality of the fund’s holdings.
Consistent monitoring ensures that the best liquid funds continue to match your risk profile and return expectations. While the NAV of liquid funds doesn’t fluctuate as much as equity funds, credit event risks and changes in RBI policy affect short-term yields.
Investors must also watch out for exit loads and minimum redemption amounts, although most Indian liquid funds offer exit loads only if redeemed within a few days of investment. Proper evaluation and timely redemption decisions can help maintain liquidity without compromising returns.
Conclusion
Investing in the best liquid funds offers Indian investors a robust option for safe, liquid, and reasonably rewarding investments. Whether through SIP or lumpsum depends on your cash flow, risk appetite, and financial goals. SIPs offer the advantage of averaged costs and disciplined investing while lumpsum investments can help grow emergency cash efficiently.
Complementing liquid funds with mid cap funds enriches your portfolio by combining safety with enhanced growth potential. Understanding taxation, fund selection criteria, and monitoring mechanisms will help you optimise returns from these investments.
Ultimately, investing wisely in liquid funds via SIP or lumpsum, alongside a strategic allocation to mid cap funds, can contribute significantly towards achieving your financial aspirations with sound risk management.