For the management of excess funds for short-term durations, two of the preferred choices are liquid funds and liquid ETFs. Both are designed to offer liquidity along with capital protection by investing in short-term debt instruments. Both of them differ in structure, accessibility, and trading methods, which can impact your investment. This article explains what liquid funds and ETFs are, their features, comparison, and advantages.
Understanding Liquid Funds
A liquid fund is a debt mutual fund that invests in short-term instruments like Treasury bills, commercial papers, and certificates of deposit. The maturity of these securities is up to 91 days.
The key features of liquid funds are:
- NAV-based Transactions: Redemptions and purchases take place at the day’s applicable Net Asset Value (NAV).
- Settlement Date: By default, the redemption proceeds are deposited in your bank account on the next business day (T+1).
- Easy Access: Easily accessible from fund houses and a mutual fund investment mobile app.
Liquid funds are typically preferred by investors who want to invest their funds while having the ability to access them on short notice.
Understanding Liquid ETFs
A liquid ETF is an exchange-traded fund that also invests in short-term debt instruments like liquid funds. The only difference is how they are purchased and sold. Liquid ETFs are traded and sold on stock exchanges like stocks.
Main features of liquid ETFs are:
- Market-based Pricing: They are purchased and sold at prices slightly above or below the NAV.
- Intraday Liquidity: It is possible to sell and purchase within market hours.
- Demat Account Requirement: It requires a Demat and trading account to trade.
Liquid ETFs can be chosen by investors who want the ease of day-trading and are comfortable with stock exchange transactions.
Differences Between Liquid Funds and Liquid ETFs
Even though both offers liquidity and short-term stability, differences may influence how appropriate they are for you.
| Aspect | Liquid Fund | Liquid ETF |
| Mode of Purchase | Through mutual fund platforms or fund houses. | Through stock exchanges. |
| Pricing | Based on daily NAV. | Based on market price, which may differ from NAV. |
| Settlement | Redemption in T+1 working day. | Sale proceeds credited as per stock market settlement rules (usually T+1). |
| Liquidity Access | Once a day at NAV. | Multiple times during market hours. |
| Account Requirement | Regular bank account. | A Demat and trading account is required. |
| Transaction Costs | May have exit loads if redeemed very quickly. | Brokerage fees may be applicable. |
When to Invest in Liquid Funds
Liquid funds are appropriate if:
- You would like a simple process without having to use a Demat account.
- You like to invest or withdraw every day without keeping track of the movement in markets.
- You think the T+1 settlement is convenient for purchasing units.
Such funds can be appropriate for retail investors who want a fund that can be liquidated easily on a mutual fund investment app.
When to Invest in Liquid ETFs
Liquid ETFs can be appropriate if:
- You already have a Demat and trading account.
- You want to buy or sell units during trading hours.
- You prefer price fluctuations on the basis of demand and supply in the market.
ETFs could be suitable for active investors or those who want intraday liquidity.
Advantages of Liquid Funds
Liquid funds offer several benefits:
- They are easily accessible through internet-based platforms.
- NAV-based pricing provides stability with no intraday volatility.
- The minimum investment requirements of liquid funds make them accessible to every investor.
Advantages of Liquid ETFs
Liquid ETFs also have some advantages:
- Intraday liquidity allows you to react to the market.
- Price transparency, since market prices can be observed in real time.
- No exit fees in the majority of instances, unless brokerage fees are charged.
Points to Keep in Mind
Before deciding between the two, consider the following pointers.
- Investment Objective: The funds can be appropriate for temporarily keeping capital.
- Exit Charges: Whereas liquid funds charge exit loads for withdrawal in a few days, ETFs charge brokerage fees.
- Accessibility of Liquidity: Investors who want same-day access through intraday trading can use ETFs as opposed to mutual funds that give next-day access to capital through NAV-based redemption.
Conclusion
Both liquid funds and liquid ETFs provide investors with alternatives to invest excess funds in the short term, with focus on capital protection as well as liquidity. The difference lies in the manner of your usage. Liquid funds are suitable for those who prefer investing via mutual fund platforms such as Axis MF, whereas liquid ETFs are suitable for those who like trading on the stock exchanges and want the convenience provided by intraday trading. Learning about their features and differences in functionality, you can select the one that aligns with your liquidity requirements and investment options.