Which funds are better than liquid funds?

Liquid funds are often the first step in an Indian investor’s journey, offering safety and easy access to funds. But as your financial goals evolve and your risk appetite grows, you might start wondering: “What’s next?”

The good news is, that the world of investment is vast and vibrant. While liquid funds are excellent for short-term needs and emergencies, several other types of funds cater to diverse goals and risk profiles.

Debt funds beyond liquid

Moving beyond liquid funds, the debt fund universe offers a spectrum of options with varying maturities and risk profiles. Here are a few noteworthy types:

  • Short-term debt funds: These invest in instruments maturing within 1-3 years, offering slightly higher returns than liquid funds while maintaining relatively low risk.
  • Ultra-short-term debt funds: Ideal for parking surplus funds for a week to a month, these invest in instruments maturing within 91 days. They offer marginally higher returns than savings accounts while maintaining high liquidity.
  • Fixed maturity plans (FMPs): These locked-in funds invest in specific debt instruments and mature on a predetermined date, offering predictable returns for specific tenures.

Diving into equity funds

If you are comfortable with moderate risk and have a longer investment horizon, equity funds can be a compelling option. They invest in company stocks, aiming to capitalize on market growth over the long term. Here are some prominent types:

  • Large-cap funds: These invest in well-established, blue-chip companies with proven track records, offering stability and moderate returns.
  • Mid-cap funds: Focusing on medium-sized companies with high growth potential, mid-cap funds offer the possibility of higher returns but with slightly more volatility.
  • Small-cap funds: Investing in smaller, emerging companies, these funds carry higher risk but also offer the potential for significant capital appreciation.

Hybrid funds for a diversified approach

Hybrid funds strike a balance between debt and equity, offering a blend of stability and growth potential. They cater to investors seeking moderate risk and long-term capital appreciation.

  • Balanced funds: Investing in a mix of equity and debt instruments in roughly equal proportions, these funds offer a balanced risk profile and steady returns.
  • Equity-oriented hybrid funds: These invest a larger portion in equities (60-80%) compared to debt, offering higher growth potential with moderate risk.

Key considerations before you invest

Remember, every investment carries its own set of risks and rewards. Choosing the right type of fund depends on your individual circumstances, financial goals, and risk appetite. Here are some key factors to consider:

Investment horizon: How long can you stay invested? Longer horizons allow for riskier options like equity funds.

Risk tolerance: How comfortable are you with potential losses? Higher risk often translates to higher potential returns.

Financial goals: Are you saving for retirement, a child’s education, or a down payment on a house? Each goal has a different ideal investment timeframe and risk profile.

Bottom line

While liquid funds offer undeniable convenience and security, their limited returns shouldn’t be the only option on your investment radar. By understanding your risk appetite and financial goals, you can explore a wider range of types of funds that potentially offer higher returns and tailor your portfolio for long-term success.