Liquid Funds vs. Liquid ETFs: Key Differences in 2025
In the financial world, investors often look for safe and flexible investment options that provide liquidity while offering reasonable returns. Two such options that have gained popularity are Liquid Mutual Funds and Liquid Exchange-Traded Funds (ETFs). While both cater to investors looking for short-term investment avenues, they have distinct characteristics. This article on Liquid Funds vs. Liquid ETFs: Key Differences in 2025 we will explore the returns, and suitability for long-term and short-term investors.
Understanding Liquid Mutual Funds
What are Liquid Mutual Funds?
Liquid Mutual Funds are simply mutual funds under the head of debt mutual funds, which primarily invest in treasury bills, commercial papers, certificates of deposits, and repurchase agreements like any other money market instrument for very short periods. A liquid mutual fund is a safe, highly liquid, and relatively risk-free means of investing, and it is an ideal investment for anyone who wants money to be invested for a short time.
Top features of Liquid Mutual Funds
- Maturity Period: Investments in securities having a maturity period not exceeding 91 days.
- Liquidity: Redemption might happen instantly within a day generally.
- Rate of Return: Higher than normal savings accounts but less than equity related ones.
- Risk quotient: Low risk, however having credit risk and interest rate risk.
- Expense Ratio: Generally low when compared to actively managed mutual funds.
- Taxation: The returns are taxed based on the tenure: Short-Term Capital Gains (STCG) tax or Long-Term Capital Gains (LTCG) tax.
Benefits of Liquid Mutual Funds
- Convenient Investment and Redemption: Open to easy inflows and outflows of cash, making it a viable source for adjunctively short-term cash management.
- Safety: Since they invest in high-credit-quality instruments, there might not be a considerable risk of capital loss.
- Better Returns than Savings Accounts: They provide better yield than traditional savings bank accounts, hence attractive vehicles to park idle cash.
- Suitability for Emergency Funds: Such high liquefied funds make it an appropriate savings mode for reserves during emergencies.
Who Can Invest in Liquid Funds?
- People or companies who want to invest surplus funds temporarily.
- Individuals wanting to earn a higher interest than a savings account but at little risk.
- Those looking for an investment space that is steady and liquid.
- First-time investors who wish to get into mutual funds at little risk.
Understanding Liquid ETFs
What are Liquid ETFs?
Liquid Exchange-traded funds (ETFs) are similar to liquid mutual funds, but they are structured somewhat differently. Such funds track either short-term government securities or money market instruments and are listed on stock exchanges with passive management. These assets can be bought and sold just like stocks, in real-time by investors.
Characteristics of Liquid ETFs
- More Tradable: Transacts throughout trading day at stock exchanges.
- Price Volatility: ETFs fluctuate, more so compared to liquid fund prices, since they depend on the law of supply and demand.
- Returns: Same as liquid mutual mutual fund but might differ due to trading aspects.
- Cost- Lower Expense Ratios: Lower than that of mutual funds because of passive management.
- Taxation: Cost of taxation rules are progressive with the same but may have different connotations for traders.
- Settlement: Following T+1 or T+2 norm for a settlement processing.
Benefits of Liquid ETFs
- Real-Time Trading Feature: This implies that the Liquid investors can buy and sell Liquid ETFs in the course of the trading day at market prices, as opposed to mutual funds that use end-day NAV pricing.
- Lower Costs: Passive management ensures that the expense ratio will generally be a lot lower than that of actively managed mutual funds.
- Transparency: Because the Liquid ETFs are traded on stock exchange, hence, their pricing is known to be more transparent than that of the mutual funds.
- Better for Large Investors: Those institutional investors would want to trade volume in a more efficient manner on their Liquid ETFs.
Who Should Invest in Liquid ETFs?
- Investors are interested in market-linked price and can afford minimal fluctuations.
- For short-term investments with good liquidity, traders are looking for opportunities to invest.
- Already has a demat account and is comfortable trading ETFs.
- Investors want to have better control over when and how their safe investments can be bought or sold.
Must read: ETFs for Beginners: A Comprehensive Guide to Investing
Liquid Funds vs. Liquid ETFs: Key Differences in 2025
Liquid ETFs which are passively managed and traded on the stock exchanges. The price of a mutual fund will be based on its Net Asset Value (NAV) and quoted at the end of the day; the ETF will be subject to real-time market forces. Liquid ETFs charge a low expense ratio and are a very cost-effective option for traders as compared with mutual funds, which normally require a demat account to make purchases. Another important difference is the settlement time; while mutual funds settle on the same-day basis, ETFs will require T-1 or T-2 settlement. By virtue of the nature of funds in question mutual funds might be relatively secure while ETFs are sometimes lightly quoted at prices above or below their NAV depending on demand and supply.
Liquid Funds vs Liquid ETFs Returns
The returns one would make from Liquid Funds and Liquid ETFs are dependent on the current interest rates and the status of the money markets. In fact, a historical record shows that liquid funds yield an annual return of 4-6% while liquid ETFs yield returns that are almost similar but may vary due to trading.
Return Influencing Factors
Some of the factors that influence the Liquid Funds vs Liquid ETFs returns are:
- Movement of Interest Rates: Raising interest rates would possibly have some effects on returns.
- Liquidity Conditions: The main difference between mutual funds and ETFs is the way market liquidity affects the pricing of the former.
- Expense Ratios of Funds: Overall, lower expense ratios in the ETFs would serve to improve returns over time.
- Market Demand: ETFs are much more flexible than many other investment products, so they are subject to slight price divergence due to the demand-supply conditions.
Taxation: Liquid Funds vs Liquid ETFs
The tax structure on Liquid Mutual Funds and Liquid ETFs is similar in nature. If held for a less than a three years period by an investor either, then the returns will be taxed as per income tax slab's applicable rules for the investor referred here as Short-Term Capital Gains - STCG. After that period has passed, gains from investments held for more than three years will be taxed under Long-Term Capital Gains (LTCG) at 20% with indexation benefits. Frequent trading of ETFs may result in higher short-term capital gain taxes, which detracts from overall profitability. While both alternatives have provisions on tax-efficient returns for long-term investors, the choice between the two ultimately boils down to the trading frequency and the investing strategy of the investor.
Tax Efficiency Considerations
The taxation treatment of Liquid Funds and Liquid ETFs is the same, thus making both tax-efficient. However, intraday traders may pay larger short-term capital gains on the ETF.
Long-terms and short-term funds Investment Approach
Both long-term and short-term funds serve different purposes, and investors should select the right fund type based on their financial goals and risk appetite.
Short-Term Investors
- Liquid Mutual Funds may be preferred owing to easy redemption and stable returns.
- Liquid ETFs would be appropriate for short-term traders seeking flexibility.
Long-Term Investors
- Neither liquid funds nor liquid ETFs are intended for long-term investment as they prefer investing in very short termed securities.
- Any investor seeking long-term capital appreciation would require to consider Debt Mutual Funds or other fixed-income instruments.
Also read: The Power of Compound Interest in Long-Term Investing
Which One Is Better- Liquid Funds vs Liquid ETFs ?
Liquid Funds vs Liquid ETFs, an investor's choice is determined by personal preference.
- For stability and simplicity: Liquid Mutual Funds.
- For market traders and real-time access: Liquid ETFs.
- For institutional and corporate investors: Liquid Funds allow much easier large redemptions.
Conclusion
In 2025, both remain dominant in short-term investment opportunities. After analyzing the differences, an investor can make a well-informed decision in accordance with their needs and consideration.
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