Examine Liquid Mutual Funds vs Liquid ETFs in India 2025. Perceive security, returns, taxation, liquidity, iNAV points, and which fits you greatest.
In the case of parking short-term surplus or creating an emergency fund, most Indian traders flip to Liquid Mutual Funds. Lately, an alternative choice—Liquid ETFs—has began attracting consideration, particularly after the recognition of Nippon’s Liquid BeES. Each appear to do the identical job: spend money on ultra-short-term, protected, high-quality debt devices like Treasury Payments and Business Papers. However in apply, they work in a different way, and the distinction turns into essential once you really attempt to purchase, promote, or redeem.
Liquid Mutual Funds vs Liquid ETF – Which is Higher in India?
On this put up, let’s dig deep into Liquid Mutual Funds vs Liquid ETFs within the Indian context of 2025. We’ll cowl taxation, liquidity, NAV vs iNAV, execution dangers, and who ought to use which product. The dialogue is written in easy, explanatory language, avoiding jargon wherever potential.
How Do Liquid Mutual Funds Work?
A Liquid Mutual Fund is the best short-term funding possibility. You place in cash immediately, and the fund invests in very brief maturity devices. Your funding begins incomes from the identical day (if positioned earlier than the cut-off). The subsequent day, the items are allotted primarily based on the day’s declared Web Asset Worth (NAV).
If you happen to redeem, the fund home straight credit the cash into your checking account, normally the subsequent enterprise day (T+1). Some funds additionally supply prompt redemption as much as Rs.50,000 per day per PAN, making them much more handy for emergency functions.
The important thing right here is that the whole lot occurs on the declared NAV. You don’t want to fret about timing, liquidity out there, or whether or not somebody is keen to purchase your items.
How Do Liquid ETFs Work?
A Liquid ETF, like Nippon Liquid BeES, works in a different way. Whereas the portfolio is broadly the identical as a liquid fund, the way in which you transact is through the inventory change. Meaning:
- You want a demat account.
- You purchase or promote items on the prevailing market value on NSE/BSE.
- Settlement occurs like every inventory commerce (T+1).
This sounds easy, however there’s a catch. The ETF has two reference values:
- NAV: Declared as soon as each day, identical to a mutual fund.
- iNAV (Indicative NAV): Up to date each 15 seconds by NSE. This displays the honest worth of the underlying portfolio in the course of the buying and selling day.
In principle, the traded value of an ETF ought to match its iNAV. However in apply, particularly in India, attributable to restricted volumes, ETFs usually commerce at a small premium or low cost to iNAV. This creates an execution threat. If you happen to purchase at a premium and later promote at a reduction, your returns could also be worse than somebody in a plain liquid fund, even when the underlying portfolio carried out identically.
NAV vs iNAV – The Transparency Problem in India
In developed markets just like the US, iNAV monitoring is close to good as a result of ETFs are extremely liquid and market makers make sure that the traded value not often deviates from iNAV. Traders even have entry to wealthy datasets, together with historic iNAV values, making it simple to back-test how environment friendly an ETF has been.
In India, the scenario is completely different.
- The NAV is out there each day from the AMC or AMFI.
- The traded value is seen from NSE or BSE historic quotes.
- However the iNAV historical past shouldn’t be accessible publicly. NSE solely reveals it stay throughout market hours, and no archive exists for retail traders.
This creates a information transparency hole. Retail traders can not confirm whether or not the ETF constantly traded near its honest worth previously. This lack of historic iNAV makes Liquid ETFs tougher to investigate in comparison with Liquid Mutual Funds, the place each day NAV historical past is publicly accessible on AMFI’s web site.
In different phrases, whereas mutual funds provide you with full transparency, ETFs in India nonetheless require you to belief that execution was honest, and not using a solution to validate traditionally.
Taxation in 2025 – Uniform for Each
Till 2023, debt mutual funds (together with liquid funds) loved favorable long-term capital positive factors taxation with indexation advantages if held for greater than 3 years. However this benefit ended from 1st April 2023.
Now, in 2025, each Liquid Mutual Funds and Liquid ETFs are taxed identically:
- Any positive factors, no matter holding interval, are taxed as per your revenue tax slab.
- There isn’t any long-term or short-term differentiation.
This implies for an individual within the 30% tax bracket, whether or not you maintain a liquid fund for at some point or one yr, or whether or not you maintain an ETF, the tax therapy is identical. Due to this fact, taxation now not performs a job in selecting between the 2.
Liquidity – The Actual Deal Breaker
In the case of liquidity, mutual funds and ETFs behave very in a different way in India.
- Liquid Funds: Redemption is all the time accessible at NAV. No dependency on consumers or sellers. AMCs assure liquidity, and the cash reaches your checking account in T+1 (or immediately for some portion in choose funds).
- Liquid ETFs: Liquidity relies on market contributors. If you wish to promote, there have to be consumers on the value you anticipate. On low-volume days, you might face a large bid-ask unfold, which implies you both promote at a lower cost or wait longer. Whereas establishments can create or redeem ETF items straight with the AMC (eradicating liquidity considerations), retail traders rely fully on change liquidity.
This makes Liquid ETFs much less dependable for emergency cash in India. In superior markets, the place ETF volumes run into hundreds of thousands of {dollars} each day, this isn’t a difficulty. However in India, the place buying and selling volumes in liquid ETFs are comparatively skinny (apart from Liquid BeES to some extent), retail traders face real execution dangers.
Who Ought to Use What?
Liquid Mutual Funds are higher fitted to most retail traders. They’re easy, clear, simple to transact, and supply predictable liquidity. In case your purpose is to park emergency funds, or short-term cash for upcoming bills, liquid funds are the clear winner.
Liquid ETFs, however, work higher for:
- Corporates, HNIs, and establishments who already use inventory change infrastructure.
- Merchants who need to use ETFs as collateral in derivatives.
- Traders preferring intraday liquidity (shopping for and promoting inside market hours).
For a standard retail investor, the demat requirement, buying and selling execution, iNAV premium/low cost, and liquidity dangers outweigh the small price effectivity advantages of ETFs.
FAQs on Liquid Mutual Funds vs Liquid ETF
Are Liquid ETFs safer than Liquid Mutual Funds?
Each spend money on the identical protected short-term devices. The distinction shouldn’t be portfolio security, however execution security. Mutual funds give assured NAV-based execution, whereas ETFs might commerce away from iNAV attributable to market liquidity.
Why does iNAV matter for ETFs and the place can I test it?
iNAV displays the real-time honest worth of an ETF. Ideally, ETF costs ought to match iNAV, however in India, they usually deviate attributable to low liquidity. Stay iNAV may be checked on NSE’s web site throughout market hours, however no historic information is out there for retail traders. This transparency hole makes it tougher to guage ETF effectivity in India.
Can Liquid ETFs give higher returns than Liquid Mutual Funds?
The underlying returns are the identical, however ETFs might have decrease bills. Nevertheless, any profit may be worn out in the event you purchase at a premium or promote at a reduction to iNAV. So in apply, returns may be worse if execution is poor.
Which is extra liquid in India—Liquid ETF or Liquid Mutual Fund?
Mutual funds assure liquidity through AMC redemption. ETFs depend upon buying and selling volumes and might face liquidity points. Therefore, for Indian retail traders, liquid funds are extra liquid in apply.
How are Liquid ETFs taxed in 2025 in comparison with Liquid Mutual Funds?
Each are taxed the identical—positive factors are added to revenue and taxed as per your slab, with no long-term profit. This rule has been in impact since April 2023.
Can retail traders use Liquid ETFs for emergency funds?
Whereas technically potential, it’s not sensible. ETFs depend upon change liquidity and will not allow you to exit at a good value throughout emergencies. Mutual funds are much more dependable for this goal.
Who ought to favor Liquid ETFs over Mutual Funds?
ETFs are appropriate for establishments, corporates, and lively merchants who want intraday liquidity or collateral utilization. For on a regular basis retail traders, liquid funds stay the higher alternative.
Conclusion
The talk between Liquid Mutual Funds vs Liquid ETFs boils all the way down to execution and transparency in India. Each spend money on protected short-term debt devices, each are equally taxed, and each intention to supply low-risk returns. However mutual funds supply clean, predictable liquidity and full transparency by way of each day NAV historical past. ETFs, whereas environment friendly in principle, endure from skinny buying and selling volumes and the absence of historic iNAV information for retail traders, making them much less dependable for on a regular basis traders.
Till Indian markets deepen and information turns into extra clear, Liquid Mutual Funds stay the superior alternative for retail traders, whereas Liquid ETFs serve area of interest wants of establishments and complicated market contributors.
Be aware – Discuss with our earlier posts on Debt Mutual Funds at “Debt Mutual Funds Fundamentals“.
