Difference Between Liquid Funds and Liquid ETFs

What Are Liquid ETFs?

Liquid Exchange Traded Funds (ETFs) are a type of mutual fund that primarily invests in short-term, highly liquid debt securities or money market instruments. If you are a direct stock investor looking for an efficient way to utilise idle cash in your trading account, liquid ETFs provide a great option. They allow you to park your funds temporarily while earning returns on your investment.

What Are the Key Differences Between Liquid Funds and Liquid ETFs?

The following table highlights the key distinctions between liquid funds vs liquid ETFs:

What Are the Advantages of Liquid Funds?  

Here is why liquid funds can be a smart choice:

• Low Risk

Liquid funds focus on protecting your principal and delivering steady returns. Their value remains stable even during fluctuations in market interest rates. Unlike funds with longer maturity, liquid funds avoid major losses during rising rates or heavy reliance on capital gains during falling rates.

• Quick Access to Funds

You can redeem your investment within one working day (T+1). Some funds even provide instant redemption, making your money available almost immediately. This is possible because liquid funds invest in highly liquid and low-risk securities.

• Cost-Effective

With expense ratios usually below 1%, liquid funds are affordable. They require less active management compared to other debt funds, which helps you maximise your effective returns.

• Flexible Investment Period

Liquid funds offer the flexibility to hold your investment for any duration. While an exit load applies to withdrawals within seven days, you can easily invest and redeem as needed, earning secure, market-linked returns.

What Are the Advantages of Liquid ETFs?

The following are the different advantages of investing in liquid ETFs:

• Maximise Returns

With liquid ETFs, your money continues to earn interest, rather than sitting idle in a margin account or generating minimal returns in a savings account. Additionally, liquid ETFs begin earning returns as soon as the trade settlement is completed, preventing the loss of returns during any waiting periods.

• Provides Flexibility

Liquid ETFs give you the flexibility to withdraw funds whenever you need it. They can serve as an instrument to hold idle cash, function as an alternative to traditional savings accounts, or act as a short-term investment solution.

• Convenience

You no longer need to transfer funds between your trading and bank accounts with liquid ETFs. These funds eliminate the hassle of waiting for cheque clearances or initiating electronic transfers into a trading account.

• Exemption from Securities Transaction Tax (STT)

Liquid ETFs stand out as they are not subject to STT, unlike many other investments. This feature helps lower your costs, making them a cost-effective choice for both short-term and long-term investors.

Who Should Invest in Liquid Funds?

The following are the investors who should invest in liquid funds:

• Bank Deposit Investors

If you usually park funds in fixed or savings deposits, consider liquid funds for better returns and flexibility. 

• Emergency Fund Savers

Liquid funds are a safe place to park your contingency funds. They offer liquidity and low returns, ensuring your money is available when needed.

• Short-Term Investors

If your investment horizon is up to 3 months, liquid funds are ideal since they invest in short-maturity securities.

• Equity Fund Investors

If you plan to move your money into equity funds, you can opt for liquid funds. This way you will be able to earn stable returns by taking lower risk.

Who Should Invest in Liquid ETFs?

• Low-Risk Investors: Liquid ETFs work well for those who prefer steady daily returns without locking their money in for a long duration.
• Short-Term Investors: If you are looking for a safe place to park your idle funds while exploring other investment opportunities, liquid ETFs can be an ideal choice.

Which Is Better – Liquid Funds or Liquid ETFs?

By now, you might have a clear understanding of the differences between liquid funds and liquid ETFs. If you actively invest or trade in stocks, liquid ETFs could suit you better. They allow you to earn returns on idle funds in your trading account. Additionally, you can pledge your ETF holdings to secure a margin for trading.

On the other hand, if you do not have a demat account or do not engage in trading, liquid funds are likely a better choice. They come with lower transaction costs, offer relatively higher returns and let you sell fractional units conveniently.