Which is better – Liquid funds or liquid ETFs?

As an Indian investor, you understand the importance of managing your finances prudently. With rising inflation and fluctuating markets, finding safe and stable investment options for your short-term money can be challenging. This is where liquid funds and liquid ETFs come into play.

But which one is the perfect fit for you?

Understanding liquid funds

Liquid funds are debt mutual funds.  These funds primarily invest in Short-term Debt Securities with maturities of up to 91 days. The key features that make Liquid Funds attractive are their liquidity, safety, and ease of investment. Investors can earn returns on their surplus cash without compromising accessibility.

Here's what makes liquid funds stand out:

• High liquidity: No waiting periods - your money is readily available.

• Safety: Invest in government-backed securities and minimize credit risk for peace of mind.

• Low minimum investment: Start small - perfect for even the most budget-conscious investors.

• Stable returns: Enjoy consistent, modest returns on your idle cash.

Understanding liquid ETFs

Liquid ETFs, or Exchange Traded Funds, share similarities with Liquid Funds as they also invest in Short-term Debt Instruments. However, the crucial distinction lies in their mode of trading. Liquid ETFs are traded on Stock Exchanges, similar to regular stocks. This characteristic adds a different level of accessibility and flexibility to this investment option.

Here’s what makes liquid ETFs stand out:

• Market-traded: Buy and sell units throughout the trading day, just like with regular stocks.

• Transparency: Get real-time insights into the ETF's holdings, offering complete visibility.

• Low expense ratios: Often lower fees than traditional mutual funds, maximising your returns.

• Instant liquidity: No need to wait for the next business day – buy or sell at the prevailing market price during trading hours.

Comparing liquid funds and liquid ETFs

Now that you have a basic understanding of both options let's compare them side-by-side on key parameters to help you make an informed choice:

Feature	Liquid mutual funds	Liquid ETFs
Liquidity	High, but redemptions typically occur at the next business day's NAV	Intraday liquidity, buy/sell units during trading hours
Transaction costs	No brokerage charges generally, but some may have exit loads	Incur brokerage charges like stocks
Expense ratio	Marginally higher	Tend to have lower expense ratios
Taxation	Taxed as per income slab if held for less than 3 years, LTCG with indexation benefits after 3 years	Similar to stocks, STCG tax for < 1 year, LTCG for > 1 year
Accessibility	Can be invested through various platforms like MFs, banks, and online platforms	Require a Demat account for trading
Customisation	Multiple options for different risk appetites and investment horizons	Limited to available ETF options
Suitability	Ideal for safety, liquidity, and ease of investment for short-term funds	More suitable for those comfortable with stock market transactions and seeking intraday liquidity

Making the right choice

Choosing between liquid funds and liquid ETFs depends on your needs and preferences. If safety, liquidity, and ease of investment are your top priorities, invest in liquid funds. They offer convenient access through various platforms and provide a haven for short-term cash. 

However, liquid ETFs might be a better fit if you are comfortable with the stock market and seek the advantage of intraday liquidity along with potentially lower expense ratios.