Which Is Better – Liquid Funds Or Liquid ETFs?

Liquid fund and liquid ETF would be pretty familiar terms for you if the investment is your favourite topic to discuss. Both funds have their definitions, conditions, and differences. If you are facing trouble investing your hard-earned cash into any of these funds, then go deep and conduct detailed research. To start investing in both funds, you also need to understand the difference. Here, we will give you a clear idea about both the funds and gradually, you will be confident in making your decision regarding investment plans. So, let’s get started first.

What Are Liquid Funds? 

A liquid fund is a debt mutual fund that invests your money in fixed-income instruments; for example, it can be government securities, treasury bills, commercial papers, and many more, and therefore, investing in these funds is a safer option. The maturity of these underlying securities is below 91 days, the risk factors automatically get lower. These funds are designed to provide high liquidity, so you must make your decision accordingly before choosing liquid funds or liquid ETFs.

Some Features Of Liquid Funds

There are three main features or characteristics you must be aware of, and these are

• Depending on each program, the minimum amount needed for these liquid funds can be variable. 
• As these funds initially invest in fixed-income assets with shorter maturities, the interest risk rate is low compared to other debt funds.
• The best part about this liquid fund is that it requires a very low exit load for the investors.
• In the liquid funds, you can invest any amount, and you can also withdraw fractional units once your returns are reinvested (for growth options)

3 Reasons To Consider Liquid Funds 

• As these funds are majorly invested in high-liquid securities with a comparatively low default probability, you can easily conduct redemption requests within only one working day. For some funds, you can get an exclusive option for rapid redemption.
• When interest rates go downward, you may experience high volatility if you have invested in longer maturity securities, but with liquid funds, you don’t get such experience. The valuation of liquid funds comparatively stays steady during high or low market rates because this fund follows the principle of safety and consistent returns.
• If you have invested in liquid funds, you can keep it for as long as you want, but remember it might be for a minimum exit load if the redemption is done within seven working days. With this fund, investors get options for flexible holding periods.

Tax Rules For Liquid Funds 

If you get a capital gain by redeeming the fund’s unit at a greater price than your purchased price then it will be taxable. More specifically, a capital gain will be taxable.

The gains made on Liquid Mutual Funds are added to the investor’s income and are taxable as per their income tax slab.

What Are Liquid ETFs?

If you look at the invested instruments then the liquid funds and liquid ETFs are quite similar. However, the added feature of being traded in the stock exchange is just like regular stocks. Therefore you get different levels of flexibility and accessibility. 

Features Of Liquid ETFs 

Before you invest in liquid ETFs, you must be aware of the key features of these funds.

• As this liquid ETF is traded like stocks on the stock exchanges, therefore you experience 100% transparency throughout the entire period of trading.
• Just like stocks you can buy or sell the liquid ETF units at the prevailing prices any time. But be aware of the trading hours first. In India the trading hour is 9.15 AM to 3.30 PM, by this time you have to make the transaction. 
• The expense ratio is less for these when compared to liquid ETFs. 
• Another important fact you must know about liquid ETFs is the trading price in 1000. Aside from this, no matter how much returns you are gaining, it will always be distributed in the form of dividends. 

Identify The Differences Between Liquid Funds and Liquid ETFs

Suitable For Liquid funds are ideal for those who are looking for a safe short-term gain through a hassle-free process. On the other hand, liquid ETFs would be easier for those who are comfortable with stock market transactions.

Flexibility Of Investment For liquid ETFs, you will get very limited options in the market but for liquid funds, you get a wide range of options from different AMCs.

Platforms To invest in a liquid ETF you must need a demat account first. But to invest in liquid mutual funds you can invest through banks and different online platforms or directly from the AMC.

Tax Rates Tax rates for liquid ETFs are similar to those for stocks, depending on the period of holding. Liquid funds in India are generally taxed as debt mutual funds. 

By now we hope you have got your answer but always remember investing in liquid funds or liquid ETFs completely depends on your demands and your aims. So try to understand the difference sincerely and also consider your financial advisor for professional guidance.

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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.