Evaluate Liquid Mutual Funds vs Liquid ETFs in India 2025. Perceive security, returns, taxation, liquidity, iNAV points, and which fits you finest.
Relating to parking short-term surplus or creating an emergency fund, most Indian traders flip to Liquid Mutual Funds. Lately, another 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 Industrial Papers. However in observe, they work otherwise, and the distinction turns into essential while 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 doable.
How Do Liquid Mutual Funds Work?
A Liquid Mutual Fund is the best short-term funding choice. You place in cash at the 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 models are allotted primarily based on the day’s declared Internet Asset Worth (NAV).
In case you redeem, the fund home immediately credit the cash into your checking account, normally the subsequent enterprise day (T+1). Some funds additionally provide 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 the whole lot occurs on the declared NAV. You don’t want to fret about timing, liquidity available in the market, or whether or not somebody is prepared to purchase your models.
How Do Liquid ETFs Work?
A Liquid ETF, like Nippon Liquid BeESworks otherwise. Whereas the portfolio is broadly the identical as a liquid fund, the way in which you transact is through the inventory trade. Meaning:
- You want a demat account.
- You purchase or promote models on the prevailing market value on NSE/BSE.
- Settlement occurs like all inventory commerce (T+1).
This sounds easy, however there’s a catch. The ETF has two reference values:
- NAV: Declared as soon as day by day, similar 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 idea, the traded value of an ETF ought to match its iNAV. However in observe, particularly in India, resulting from restricted volumes, ETFs typically commerce at a small premium or low cost to iNAV. This creates an execution danger. In case you 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 be sure that the traded value hardly ever deviates from iNAV. Traders even have entry to wealthy datasets, together with historic iNAV valuesmaking it simple to back-test how environment friendly an ETF has been.
In India, the scenario is completely different.
- The NAV is out there day by day from the AMC or AMFI.
- The traded value is seen from NSE or BSE historic quotes.
- However the iNAV historical past just isn’t obtainable publicly. NSE solely exhibits 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 tougher to investigate in comparison with Liquid Mutual Funds, the place day by 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, with out a technique to validate traditionally.
Taxation in 2025 – Uniform for Each
Till 2023, debt mutual funds (together with liquid funds) loved favorable long-term capital features 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 features, no matter holding interval, are taxed as per your earnings tax slab.
- There is no such thing as 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 yr, or whether or not you maintain an ETF, the tax remedy is identical. Due to this fact, taxation now not performs a job in selecting between the 2.
Liquidity – The Actual Deal Breaker
Relating to liquidity, mutual funds and ETFs behave very otherwise in India.
- Liquid Funds: Redemption is all the time obtainable 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 will depend on market members. If you wish to promote, there should be consumers on the value you count on. On low-volume days, chances are you’ll face a large bid-ask unfold, which suggests you both promote at a cheaper price or wait longer. Whereas establishments can create or redeem ETF models immediately with the AMC (eradicating liquidity considerations), retail traders rely totally on trade 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} day by 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 suited to most retail traders. They’re easy, clear, simple to transact, and supply predictable liquidity. In case your aim is to park emergency funds, or short-term cash for upcoming bills, liquid funds are the clear winner.
Liquid ETFs, then again, work higher for:
- Corporates, HNIs, and establishments who already use inventory trade 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 just isn’t portfolio security, however execution security. Mutual funds give assured NAV-based execution, whereas ETFs could commerce away from iNAV resulting from market liquidity.
Why does iNAV matter for ETFs and the place can I verify it?
iNAV displays the real-time honest worth of an ETF. Ideally, ETF costs ought to match iNAV, however in India, they typically deviate resulting from low liquidity. Reside 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 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 could have decrease bills. Nonetheless, any profit could be worn out for those who purchase at a premium or promote at a reduction to iNAV. So in observe, 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 upon buying and selling volumes and may face liquidity points. Therefore, for Indian retail traders, liquid funds are extra liquid in observe.
How are Liquid ETFs taxed in 2025 in comparison with Liquid Mutual Funds?
Each are taxed the identical—features 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’s not sensible. ETFs rely upon trade liquidity and should 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 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 offer low-risk returns. However mutual funds provide easy, predictable liquidity and full transparency by way of day by day NAV historical past. ETFs, whereas environment friendly in idea, 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 complex market members.
Be aware – Check with our earlier posts on Debt Mutual Funds at “Debt Mutual Funds Fundamentals“.