Should I invest in a liquid fund as a long-term investor?

Ans: You can STP into these schemes

1. Axis ESG Equity Fund (Growth)
2. Parag Parikh Flexi Cap Fund (Growth)
3. SBI Magnum Global Fund (Growth)
4. DSP Quant Fund (Growth)

 

Ans: Nice portfolio, please continue.

 

Ans: Rebalancing your portfolio and shifting part of your investments into liquid funds may seem unnecessary at first glance. However, the idea goes beyond just liquidity. Let's explore why this is important and how it can benefit your financial plan.

1. Portfolio Rebalancing and Risk Management
When your mutual fund app suggests rebalancing, it aims to maintain your desired asset allocation. Over time, your equity investments may outperform, leaving your portfolio more equity-heavy. While this can lead to higher potential returns, it also exposes you to greater risk.

Rebalancing into liquid funds or debt funds reduces exposure to market volatility.

It helps maintain a balanced risk-return profile aligned with your financial goals and risk tolerance.

Liquid funds act as a safety cushion by providing low-risk, low-volatility returns while maintaining liquidity.

2. When to Redeem from Equity Mutual Funds
You can redeem your equity mutual funds whenever needed. However, withdrawing from equities during a market downturn can lock in losses. Timing the market is difficult, so rebalancing gradually by moving some funds to liquid instruments ensures that you protect gains without abruptly exiting the equity market.

Redeem equity funds when they have met your financial goals, or the market reaches your target.

Avoid redeeming equity funds for short-term needs since the market can fluctuate.

Instead of reacting to market changes, you can shift profits into liquid funds and keep the core equity investment intact.

3. Purpose of Liquid Funds Beyond STP
Liquid funds are more than just a tool for Systematic Transfer Plans (STP) when making lump-sum investments. While they help with gradual investment into equity, they also serve as an essential part of your overall financial plan:

Emergency Fund: Liquid funds provide instant liquidity. You can redeem these funds within 24 hours without much hassle, making them an ideal emergency fund. Credit cards may offer short-term relief, but using credit means accumulating debt, which can be costly if not paid off on time.

Regular Withdrawals: If you need funds for ongoing expenses, a Systematic Withdrawal Plan (SWP) from a liquid fund is a convenient and efficient way to meet those needs. This reduces reliance on credit cards.

Short-Term Goals: If you have financial goals within 1-2 years (e.g., a holiday or home renovation), liquid funds are a safer choice compared to equity, which can be volatile in the short run.

4. Why Transfer from Equity to Liquid Fund?
There are several reasons to consider moving part of your investments from equity to liquid funds:

Market Volatility: Equity funds can be highly volatile. Transferring part of your profits to liquid funds helps lock in gains and avoid losses during downturns.

Goal Achievement: As you get closer to achieving your financial goal, reducing equity exposure and shifting to liquid or debt funds helps protect the gains. This strategy ensures your goal is not jeopardized by sudden market fluctuations.

Income Stability: For retirees or those nearing retirement, liquid funds provide a steady, predictable income source through SWP, unlike equity funds which can fluctuate.

5. Cost and Timing Consideration
You mentioned that exit loads in mutual funds are bearable. Indeed, the exit loads in most equity mutual funds are minimal if the holding period is longer than a year. However, there are other factors to consider when switching between funds:

Market Timing: If the market is at a high, it makes sense to rebalance and transfer a portion of your funds to liquid assets. This way, you are securing profits and reducing risk.

Goal-Based Planning: If you have achieved part of your target in equity, moving some money into a less risky asset (like a liquid fund) ensures that you safeguard your progress while still maintaining some exposure to growth.

6. Credit Card vs Liquid Fund for Emergency Needs
While using a credit card may defer payments for 30-55 days, it can lead to unnecessary debt if not managed carefully. Here’s why liquid funds are better for emergency needs:

No Interest Charges: Unlike credit cards, liquid funds don’t come with interest charges. You can access your money without the burden of repayment or interest.

Instant Access: Liquid funds provide quick redemption, often within 24 hours. This ensures you have access to cash whenever needed without the need to borrow.

Credit Card Limits: You are limited by the credit limit on your card, while liquid funds offer flexibility depending on how much you have invested.

Debt Avoidance: Using credit cards for emergencies can lead to a cycle of debt if you’re unable to pay the balance in full. Liquid funds ensure you don’t accumulate unnecessary liabilities.

7. Long-Term Investment Strategy
Liquid funds play a crucial role in building a balanced, diversified portfolio. While equity funds are great for long-term wealth creation, liquid funds serve as a buffer to provide liquidity and reduce volatility.

Liquid funds are ideal for parking short-term surpluses, making them readily available when needed.

Equity funds are for growth, while liquid funds ensure stability and liquidity.

By maintaining a mix of equity and liquid funds, you ensure that your portfolio is aligned with both short-term and long-term needs.

8. No Need to Exit Equity Fully
You don’t need to fully exit equity to invest in liquid funds. Instead, consider moving only a portion of your profits or capital to liquid funds. This ensures that your money is working for you, but you also have liquidity for unexpected expenses.

Maintaining equity exposure is important for long-term wealth creation, but liquid funds give you the flexibility and safety needed for short-term needs and emergency situations.

9. Opportunity for Rebalancing in a Market Correction
By keeping funds in liquid investments now, you prepare yourself for opportunities that may arise during market corrections. When the equity market corrects, you’ll have funds readily available in liquid funds. This allows you to rebalance by moving money from liquid funds back into equity, buying at lower prices.

This strategy ensures you take advantage of market dips and avoid selling equity at a loss during downturns.

A disciplined rebalancing approach can help you build long-term wealth without taking unnecessary risks.

Final Insights
Liquid funds are an important part of your financial strategy, not just for short-term investments or STPs, but also for providing liquidity and stability in your portfolio.

Rebalancing your portfolio by moving a portion from equity to liquid funds helps in risk management and goal protection.

Liquid funds serve as an emergency fund, ensuring that you are not forced to sell equity during market downturns or rely on credit cards for urgent payments.

Consider using liquid funds strategically for goal-based planning, and keep a balanced mix of equity for growth and liquid funds for safety and liquidity.

By keeping funds in liquid investments, you can take advantage of market corrections by rebalancing back into equity at lower prices.

By taking a balanced approach, you can ensure that your investments align with both short-term and long-term goals while reducing the risk of market volatility.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: LIC Jeevan Anand offers both insurance and savings. However, such plans usually provide modest returns. You mentioned your plan will give Rs. 22 lakh on maturity after 21 years. While it offers life cover, the returns from these traditional plans are generally lower than market-linked investments like mutual funds.

Insurance-cum-investment plans bundle insurance with savings, but each may underperform compared to separate insurance and investment solutions. You may want to assess if holding the policy further aligns with your financial growth goals.

Impact of Redirecting to SIPs
SIP investments in mutual funds have the potential for higher returns over the long term. With regular contributions, equity funds can benefit from market growth and compounding.

By stopping your LIC premiums and redirecting to SIPs, you could explore higher returns, particularly over 15 to 20 years. The flexibility of SIPs allows adjustments based on changing financial conditions, unlike fixed traditional plans.

Taxation Benefits and Drawbacks
LIC maturity proceeds are usually tax-exempt under Section 10(10D) of the Income Tax Act. On the other hand, equity mutual funds have new capital gains taxation rules.

For SIPs, long-term capital gains (LTCG) above Rs. 1.25 lakh are taxed at 12.5%. Short-term gains are taxed at 20%. This taxation needs to be considered, but even with taxes, the growth potential could exceed traditional insurance plans.

Insurance and Investments: A Better Approach
Instead of combining insurance and investment in one product, a Certified Financial Planner would suggest separating them. You can retain life cover with a term insurance policy, which offers higher coverage at a lower cost. This ensures your family’s financial security.

Meanwhile, investments through mutual fund SIPs offer targeted financial growth, like child education or retirement planning. Regularly tracking and rebalancing these investments also ensures they stay aligned with your long-term goals.

Should You Surrender LIC? A Careful Evaluation
Surrendering an insurance policy midway can result in a reduced payout. You need to check the surrender value and compare it with your financial situation. If the surrender value is significantly lower, you may decide to continue.

However, future premiums can be redirected toward SIPs to optimise returns. It is a gradual shift rather than an immediate stop. Also, since you have already completed seven years, evaluate if staying invested till maturity aligns with your expectations.

Why Mutual Funds Are a Strong Option
Higher Returns: Equity mutual funds have historically outperformed traditional insurance plans over the long term.

Liquidity: Mutual funds offer liquidity, allowing withdrawals in case of emergencies without penalties.

Professional Management: Mutual fund managers actively manage your investments, aiming for higher growth. This gives you an advantage compared to passive, fixed insurance returns.

Goal-Based Planning: With SIPs, you can create a corpus for retirement, children’s education, or wealth creation.

Avoiding the Pitfalls of Direct Funds
Many individuals are attracted to direct funds because of lower expenses. However, managing your portfolio alone may become overwhelming. Direct plans require constant monitoring and a deep understanding of markets.

Investing through a Mutual Fund Distributor (MFD) with a Certified Financial Planner can provide expert advice. A professional helps with portfolio rebalancing, tax-saving strategies, and timely switches between funds. This structured support can optimise your wealth-building journey.

Active Funds vs. Index Funds
Index funds passively follow the market, but they may not provide the best results during market volatility. Actively managed funds, on the other hand, aim to outperform the market through the expertise of fund managers.

In volatile times, active funds have the flexibility to adjust holdings. This ensures your investment portfolio remains aligned with market trends. Active management adds value, especially for long-term goals like retirement or wealth accumulation.

Long-Term SIPs and Financial Freedom
Shifting your LIC premium to SIPs for 15 to 20 years can help build substantial wealth. Even with market fluctuations, staying invested ensures you benefit from compounding and market recoveries.

SIPs also offer the flexibility to increase contributions over time as your income grows. This ensures your wealth-building efforts remain in sync with your financial aspirations.

Final Insights
Redirecting your LIC premium to SIPs can enhance your financial growth. However, surrendering the policy needs careful evaluation of costs and benefits. If the surrender value is low, continuing the policy till maturity could be wiser.

Separating insurance and investment ensures better coverage and optimised returns. Mutual funds, through SIPs, offer a versatile approach to building wealth, providing liquidity, flexibility, and professional management.

A balanced approach, where you retain essential life cover and invest systematically, will secure both your financial future and your family's needs.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment