Examine Liquid Mutual Funds vs Liquid ETFs in India 2025. Perceive security, returns, taxation, liquidity, iNAV points, and which fits you finest.
In relation to parking short-term surplus or creating an emergency fund, most Indian traders flip to Liquid Mutual Funds. In recent times, 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 another way, and the distinction turns into essential whenever you really attempt to purchase, promote, or redeem.
Liquid Mutual Funds vs Liquid ETF – Which is Higher in India?
On this submit, let’s dig deep into Liquid Mutual Funds vs Liquid ETFs within the Indian context of 2025. We are going to 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 doable.
How Do Liquid Mutual Funds Work?
A Liquid Mutual Fund is the only short-term funding possibility. You place in cash right this moment, and the fund invests in very quick maturity devices. Your funding begins incomes from the identical day (if positioned earlier than the cut-off). The following day, the items are allotted based mostly on the day’s declared Internet Asset Worth (NAV).
For those who redeem, the fund home straight credit the cash into your checking account, often the subsequent enterprise day (T+1). Some funds additionally supply immediate 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 every thing occurs on the declared NAV. You don’t want to fret about timing, liquidity out there, or whether or not somebody is prepared to purchase your items.
How Do Liquid ETFs Work?
A Liquid ETF, like Nippon Liquid BeES, works in another way. Whereas the portfolio is broadly the identical as a liquid fund, the best way you transact is through the inventory trade. Meaning:
- You want a demat account.
- You purchase or promote items on the prevailing market worth 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 every 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 throughout the buying and selling day.
In principle, the traded worth of an ETF ought to match its iNAV. However in apply, particularly in India, as a result of restricted volumes, ETFs typically commerce at a small premium or low cost to iNAV. This creates an execution threat. For those who 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 excellent as a result of ETFs are extremely liquid and market makers make sure that the traded worth hardly ever deviates from iNAV. Traders even have entry to wealthy datasets, together with historic iNAV values, making it straightforward to back-test how environment friendly an ETF has been.
In India, the scenario is completely different.
- The NAV is out there every day from the AMC or AMFI.
- The traded worth is seen from NSE or BSE historic quotes.
- However the iNAV historical past isn’t obtainable publicly. NSE solely reveals it reside throughout market hours, and no archive exists for retail traders.
This creates a knowledge transparency hole. Retail traders can not confirm whether or not the ETF constantly traded near its honest worth up to now. This lack of historic iNAV makes Liquid ETFs more durable to investigate in comparison with Liquid Mutual Funds, the place every day NAV historical past is publicly obtainable 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 earnings tax slab.
- There isn’t a 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 someday or one 12 months, or whether or not you maintain an ETF, the tax remedy is identical. Due to this fact, taxation not performs a task in selecting between the 2.
Liquidity – The Actual Deal Breaker
In relation to liquidity, mutual funds and ETFs behave very in another way in India.
- Liquid Funds: Redemption is all the time obtainable at NAV. No dependency on patrons 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 should be patrons on the worth you count on. On low-volume days, chances are you’ll face a large bid-ask unfold, which implies you both promote at a cheaper price or wait longer. Whereas establishments can create or redeem ETF items straight with the AMC (eradicating liquidity issues), retail traders rely completely on trade liquidity.
This makes Liquid ETFs much less dependable for emergency cash in India. In superior markets, the place ETF volumes run into thousands and thousands of {dollars} every 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, straightforward to transact, and supply predictable liquidity. In case your objective is to park emergency funds, or short-term cash for upcoming bills, liquid funds are the clear winner.
Liquid ETFs, alternatively, work higher for:
- Corporates, HNIs, and establishments who already use inventory trade infrastructure.
- Merchants who wish 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 value 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 isn’t portfolio security, however execution security. Mutual funds give assured NAV-based execution, whereas ETFs might commerce away from iNAV as a result of market liquidity.
Why does iNAV matter for ETFs and the place can I examine it?
iNAV displays the real-time honest worth of an ETF. Ideally, ETF costs ought to match iNAV, however in India, they typically deviate as a result of low liquidity. Dwell iNAV could be checked on NSE’s web site throughout market hours, however no historic knowledge is out there for retail traders. This transparency hole makes it more durable to evaluate 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. Nonetheless, any profit could be worn out should you purchase at a premium or promote at a reduction to iNAV. So in apply, returns could 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 rely on buying and selling volumes and may 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 earnings 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 doable, it isn’t sensible. ETFs rely on trade liquidity and will not allow you to exit at a good worth throughout emergencies. Mutual funds are much more dependable for this goal.
Who ought to desire 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 controversy 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 goal to supply low-risk returns. However mutual funds supply clean, predictable liquidity and full transparency by means of every day NAV historical past. ETFs, whereas environment friendly in principle, endure from skinny buying and selling volumes and the absence of historic iNAV knowledge for retail traders, making them much less dependable for on a regular basis traders.
Till Indian markets deepen and knowledge 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.
Word – Check with our earlier posts on Debt Mutual Funds at “Debt Mutual Funds Fundamentals“.
