SIP in liquid funds: Investing for short-term goals

When it comes to investing for short-term goals, it's important to choose options that are both flexible and relatively stable. One such investment approach gaining popularity among Indian investors is the Systematic Investment Plan (SIP) in liquid funds.

Let’s take a closer look at what SIP in liquid funds is about, and why it could be a suitable choice for potentially achieving your short-term financial goals.

• Table of contents

1. Understanding SIP in liquid funds
2. Advantages of SIP in liquid funds
3. Considerations for SIP in liquid funds
4. Comparison with other investment options for short-term goals
5. Who Should Invest in Liquid Mutual Funds?
6. Taxation Rules of Liquid Mutual Funds

Understanding SIP in liquid funds

SIP is a method of investing in mutual funds, where you invest a fixed amount at regular intervals. Liquid funds, on the other hand, are debt mutual funds that invest in short-term market instruments like treasury bills and government securities. These funds are known for their high liquidity and comparatively low market risk, making them suitable for short-term investment. Combining SIP with liquid funds not only brings about financial discipline but also helps in averaging out the cost of investment over time.

Advantages of SIP in liquid funds

Risk management: Liquid funds invest in low-risk securities, offering a relatively stable investment avenue. This reduces the overall risk compared to equity funds, which are subject to market fluctuations.

Liquidity: One of the key features of liquid funds is that they allow investors to quickly redeem your investment, often within 24 hours. This makes them highly liquid and a suitable option for emergency funds or when you need quick access to your money. You can also make use of the insta-redemption facility.

Flexibility: SIPs are flexible in terms of investment amount and frequency. Whether you want to invest a small or large amount, monthly or quarterly, SIPs cater to various financial capabilities and goals.

Compounding benefit: Though liquid funds offer a modest return potential, the power of compounding plays a crucial role, especially with regular SIP investments. Over time, even small, consistent investments can accumulate a significant corpus.

Ease of investment:Investing through SIP in liquid funds is straightforward and hassle-free. It can be started with minimal documentation and managed online, making it convenient for everyone. An SIP calculator can assist investors in planning their investment amount and tenure, based on the expected returns on their investment. Do note, however, that the SIP calculator provides estimates based on your inputs, and returns are not guaranteed or fixed in mutual fund investments.

Considerations for SIP in liquid funds

Investment horizon: While suitable for short-term financial goals (up to a year), liquid funds may not be an ideal choice for long-term wealth accumulation due to their conservative nature.

Returns expectation: Returns on liquid funds are generally modest, in line with the low-risk profile of these investments. It's important to have realistic expectations regarding the growth of your investment.

Expense ratio:Always check the expense ratio associated with the fund. High costs can significantly impact your net returns, especially in a low-return environment.

Comparison with other investment options for short-term goals

Fixed deposits (FDs): FDs offer fixed returns and are considered very stable. However, they lack the liquidity offered by liquid funds, often imposing a penalty on early withdrawals.

Savings account: While a savings account is highly liquid, the return potential is usually lower than that offered by liquid funds. Thus, liquid funds can provide a better balance between return potential and accessibility. However, returns from liquid funds are not guaranteed.

Equity funds: Though they have a higher return potential, equity funds are more suitable for long-term goals due to the higher associated risk. For short-term objectives, the volatility of equity markets makes them less suitable as investment options.

Recurring deposits (RDs): Similar to SIPs, RDs involve regular deposits. However, they offer fixed returns and lack the potential for higher growth that market-linked instruments like liquid funds can provide. However, returns aren’t guaranteed in case of liquid funds.

Ultra-short and short-duration funds: These are similar to liquid funds but may take slightly more risk for potentially higher returns. However, they also come with increased volatility compared to liquid funds.

Who should invest in liquid mutual funds?

For investors with a low to moderate risk tolerance, liquid funds can be an suitable option. Although liquid funds do not offer guaranteed returns like fixed deposits, they typically provide the potential for better returns, especially when compared to traditional fixed deposits with shorter tenures, such as one year or a year and a half. Liquid funds primarily invest in short-term debt instruments, making them a relatively stable alternative for those looking to avoid higher market risks while still aiming for reasonable returns.

The key advantages of liquid funds lie in their liquidity and flexibility. These funds allow investors to quickly access their money without penalty, making them a suitable choice for parking surplus cash, saving for short-term financial goals, or building an emergency fund. With lower risk than equities, yet offering relatively better returns than traditional investment avenues, liquid funds can be suitable for individuals looking to keep their funds easily accessible while earning moderate returns.

Taxation Rules of Liquid Mutual Funds

For investments made on or after April 1, 2023, Long-Term Capital Gains (LTCG) from liquid funds will be taxed at a flat rate of 20%, with no benefit of indexation. This means the entire gain will be subject to tax, which could result in a higher tax liability compared to investments made prior to April 1, 2023, where indexation could help reduce the taxable amount.

Conclusion

SIP in liquid funds can be a suitable choice for those looking to invest for short-term goals. It offers a blend of low risk, flexibility, and liquidity, making it a suitable option for both new and seasoned investors. If you’re looking to add liquid funds to your portfolio, an option to consider is the Bajaj Finserv Liquid Fund. Known for its relatively stable return potential and low expense ratio, it can be a suitable choice for investors looking to park their funds for short durations. The fund’s portfolio comprises high-quality debt instruments, ensuring relative stability and liquidity. For a detailed scheme information, visit the scheme page.

FAQs:

What is SIP in liquid funds?

SIP in liquid funds refers to a systematic investment plan in liquid mutual funds, where you invest a fixed amount at regular intervals in a liquid fund.

How does SIP work in liquid funds?

In SIP for liquid funds, you decide on an amount and frequency (monthly, quarterly, etc.) to invest. This amount is then automatically invested in the chosen liquid fund at each interval. Investors can also choose a top up SIP, where the SIP contributions are increased by a fixed percentage at regular intervals ( semi-annually, annually etc). An SIP top up calculator can help investors assess the potential returns on their investment and compare this to a regular SIP.

What are the advantages of investing in liquid funds for short-term goals?

The main advantages include relatively low risk, high liquidity, flexibility in investment amount and frequency, and the benefit of compounding.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.