Mutual fund investments offer a great opportunity to start working for your financial future security, even with limited capital. There are different types of mutual funds that cater to investors with different risk profiles, such as aggressive, moderate, and conservative. Equity funds aim to provide high returns with high risk, debt funds focus on stability through lower volatility and reduced risk in exchange for less but stable returns. And if you want the best of both worlds, hybrid funds offer exposure to different asset classes and add diversification to your portfolio.
However, if you are a conservative and risk-averse investor who wants immediate access to the funds while still earning decent returns, liquid funds may fill the gap. But should you go with liquid mutual funds or liquid ETFs (exchange-traded funds)? Keep reading to find out.
What are liquid funds?
Liquid funds are open-ended debt mutual funds that predominantly invest in money market instruments such as commercial papers, treasury bills, certificates of deposit, etc., that mature within 91 days. These investments usually have high liquidity and almost nil interest rate and credit risk.
The main benefit of investing in a liquid fund is that it provides investors with quick access to their money should they need it in an emergency. These investments have short-term maturities, so investors aren’t bound to long-term commitments or have their funds tied up for extended periods.
What are liquid fund ETFs?
Liquid ETFs are similar to liquid funds; however, they invest in very short-maturity instruments such as overnight low-risk securities. The units are traded on the stock exchange, and you can buy or sell on the stock exchange just like stocks.
Liquid funds or liquid fund ETFs? Pointers to understand before choosing an option
- Liquid ETFs enable investors to observe the movements of their investments on a real-time basis and make trading decisions more quickly. The ability to buy or sell fund units during market hours also gives investors greater control over when they can enter or exit the market. However, for most mutual fund schemes, the cut-off time is 3:00 PM.
- With liquid ETFs, fund houses apply different approaches to dividend distributions – some reinvest them for long-term growth, while others credit the accrued dividend to an investor’s bank account.
Most liquid mutual funds come with growth and dividend payout options. And if you choose a dividend option, you can select the frequency (daily, weekly or monthly) as per your investment goals and profile.
- To trade liquid ETFs, it is important to have a Demat account that allows holding, buying, selling, and transacting all securities.
Liquid funds or liquid fund ETFs? Where to invest?
Liquid ETFs can be attractive for those looking to engage in active day trading. Furthermore, the transaction cost is comparatively low due to no securities transaction tax (STT). Additionally, as these are ETFs, they offer lower expense ratios compared to other mutual funds.
Liquid fund investment can be ideal for investors seeking a low-risk and short-term option to park their money but also want to generate a higher return than what is typically offered in savings accounts. Investors who have surplus funds that they are looking to invest safely with minimum risk may consider liquid mutual funds. Additionally, these investments can be used as a channel to invest in equity funds through a systematic transfer plan (STP).
You can even start an SIP in liquid mutual funds to discipline your investing. However, using an SIP calculator beforehand is recommended to determine the ideal sum to invest regularly and get an estimate of the total returns on investment at maturity.