Where Should I Invest A Lump Sum? Liquid Funds or Equity Funds?

If you are investing a lump sum amount, you will naturally want to know the difference between equity debt and liquid funds before you invest your money. Of late, there have been several comparisons of equity vs. liquid funds made by investors with regard to deploying a lump sum amount.

The basic rules behind choosing any mutual fund will always be universal, no matter the mutual fund type that you opt for. You can select funds on the basis of specific financial goals, your horizon for making the investment, and your overall risk profile.

Before getting into the equity fund or liquid fund SIP or lump sum dilemma, you should first analyze whether you want this amount back in the long run. You can also zero in on a specific goal and make an investment likewise. Knowing where to invest a lump sum amount will hold you in good stead.

If you require this amount within 3-4 years or so, you should choose debt funds. This also holds good if you are seeking to accomplish any particular financial goal.

However, if you are investing for a year or a few months at best, you can make an investment in an ultra short term scheme. If you are investing for 2 years or so, you can choose short term schemes to invest. It all depends on your own financial goals and how you wish to achieve them.

Key aspects worth knowing about Equity funds and Lumpsum investment

Suppose you do not require the funds right away or you are looking to accomplish a financial goal that is at least 5-7 years away, you may choose equity funds for your investment. Select the scheme that aligns best with your own risk profile and investment objective. You can also seek advice from market experts with regard to the SIP vs. lump sum mutual fund investment proposition.

At the same time, be careful if you are putting in a lump sum amount in one go. While this may reap you rich rewards in particular scenarios, it may also go wrong if the market timing is incorrect.

Some feel that initially, SIPs (systematic investment plans) are the best option. They help in spreading the risk with smaller amounts and you can always scale up in the near future. They also help you inculcate financial discipline while you benefit from rupee cost averaging and the power of compounding too. The above-mentioned insights are what will help you make the choice between investing in equity and liquid funds.

Equity funds and their nature

These are the types of funds that majorly deploy investments across arbitrage, equity, and debt alike. They invest at least 65% across equities which includes arbitrage positions and at least 10% for debt. They have also surpassed the performance of other equity segments during volatile scenarios in the market.

Going by several reports, mid-cap funds have offered negative returns over the last year and the same story is true for small-cap funds. Yet, ELSS or tax-saver funds have returned 1.35% while large and mid-cap funds have generated returns of 1.47%. Multi cap funds have returned 2.04% while equity savings schemes have returned 4.27% which is higher than other categories in this basket. Equity savings plans will attract STCG (short term capital gains) at 15% for less than 12 months. LTCG (long term capital gains) will apply for periods surpassing one year and the rate is 10% if the gains surpass Rs. 1 lakh.

Investors usually expect anywhere between 9-11% in returns from equity funds. Equity has better tax efficiency as per several investors when compared to ultra-short-term and liquid funds for systematic transfer plans or parking lump-sum amounts. Short-term capital gains for debt funds will be added to your income and taxation will apply as per your specific income tax slab.

Liquid funds and what they entail

Liquid funds are schemes that are open-ended and make investments in instruments in the debt and money markets. The maturity period stands at a maximum of 91 days. This strategy helps in lowering risks that come out of volatility in rates of interest while ensuring higher portfolio liquidity and generating income in a more stable manner. The returns may not always be as high as equity funds although they are secure options, particularly for those seeking alternatives to bank FDs (fixed deposits).

The risk quotient across both investment types

The risk quotient is comparatively higher for equities since they are impacted directly by movements and fluctuations in the market. Since they make investments in stocks/shares, any fluctuations in prices of the same will naturally affect the net asset value (NAV) of the fund in question. In spite of the risks here, investors should remember that the fund corpus will be invested across several industries/companies for diversification and lower volatility in the case of consistently high-performing equity funds.

Liquid funds are suitable for parking lump sum amounts with the lowest risk quotient. Returns will not be as high but they are extremely safe. Now that you have a basic idea of what both types of funds entail and their specific natures, you can weigh the pros and cons before investing.