When it comes to managing short-term surplus funds, Liquid Funds and Liquid ETFs are two popular investment options in India. Both offer low-risk, short-term investment options, but they differ in structure, returns, taxation, and accessibility. Understanding these differences is crucial for making an informed investment decision.
Understanding the Basics:
Liquid Funds are a type of debt mutual fund that primarily invests in short-term debt instruments with maturities up to 91 days. They offer daily liquidity and are suitable for investors looking to park surplus funds for a short duration. See more about Liquid Funds on “Liquid Funds – Safe and Flexible Investing” on Artho Shorts.
Liquid ETFs, on the other hand, are exchange-traded funds that invest in overnight securities, such as Tri-Party Repos (TREP). They trade on stock exchanges like individual stocks and aim to provide returns similar to the overnight lending rate. See more about Liquid Funds on “Liquid ETFs: Low-Risk, High-Liquidity” on Artho Shorts.
Key Differences:
There are several important differences that investors need to consider in Liquid Funds Vs Liquid ETFs:
Structure and Trading Flexibility:
- Liquid Funds: They are open-ended mutual funds managed by professional fund managers. Investors buy and sell units based on the fund’s NAV at the end of the day. The process is typically slower compared to ETFs, as redemption requests can take up to two business days.
- Liquid ETFs: These funds are traded on stock exchanges, offering more flexibility for investors. They can buy and sell units throughout the trading day at market prices, which may differ slightly from the NAV.
Returns and Performance:
- Liquid Funds: Liquid funds usually offer consistent but modest returns, typically ranging from 3% to 6% per annum. The returns depend on the fund manager’s investment decisions and market conditions.
- Liquid ETFs: Liquid ETFs have the potential for slightly higher returns, as they track specific market indices. However, returns can vary depending on market performance, and ETFs can sometimes be more volatile than liquid funds.
Taxation:
- Liquid Funds: The returns from liquid funds are subject to short-term capital gains tax (STCG) if held for less than three years. The tax rate is 15% on short-term gains.
- Liquid ETFs: Similar to liquid funds, liquid ETFs are also subject to STCG tax if held for less than three years. However, ETFs may offer tax advantages in certain cases, such as if held for longer durations (long-term capital gains tax).
Which Fits You?
Both liquid funds and liquid ETFs are ideal for investors looking for low-risk, liquid investments. Your choice between the two largely depends on your preference for convenience versus control. If you want professional management and are willing to wait one day for liquidity, liquid funds are a solid choice. However, if you prefer a more hands-on approach, with real-time trading and potentially lower costs, liquid ETFs might suit you better.
Moreover, if you’re new to investing or want to avoid trading on the stock market, liquid funds could be a safer starting point. Conversely, seasoned investors familiar with stock trading may benefit from the direct control and flexibility offered by liquid ETFs.
Conclusion:
Understanding the differences between liquid funds and liquid ETFs is crucial for any investor in India looking for low-risk, high-liquidity options. While liquid funds offer a managed approach with consistent returns, liquid ETFs provide more trading flexibility and potentially higher returns. Both options have their merits, so choose wisely based on your financial goals and preferences. Ready to park your cash? Explore more fund insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Liquid Funds vs Liquid ETFs here – https://www.bajajamc.com/liquid-funds-liquid-etfs