The choice between liquid funds and debt funds can be a tricky one. Both are fixed-income securities and long-term capital gain from them is taxed at a flat 20% after indexation. You can consider consulting a mutual fund advisor to understand these funds in detail.
However, it is advisable that you also have the basic knowledge of these funds to make an informed choice. Here are some major differences between both funds.
Debt funds are an investment option available in a mutual fund scheme. They invest money in assets such as government bonds, money market instruments, and corporate bonds.
Liquid funds are a class of debt funds. They invest money in assets such as treasury bills, commercial paper, and government securities.
You can invest money in debt funds for one day to 10 years. So, you can keep a short-term, mid-term or long-term horizon as per your investment goals.
Liquid funds have a maturity period of up to 91 days only.
If you hold debt funds for a longer period, the interest and credit risk are higher.
Since liquid funds have a short maturity period and limited exposure to interest rates, the risk is much lesser. They are less volatile.
Debt funds yield higher returns than liquid funds, especially the longer you stay invested. However, interest rate fluctuations are likely to affect the returns of debt funds.
On the contrary, liquid funds offer comparatively lesser returns than debt funds but higher returns than interest rates in bank savings accounts. The returns are more stable than debt funds.
Debt funds are usually moderately liquid because there may be certain restrictions on redemption, depending on the scheme in which you have invested.
Liquid funds can be easily redeemed and converted into cash anytime because there are no exit charges. So, if your investment goal is high liquidity, then liquid funds are a better option than debt funds.
The NAV on debt funds is calculated only on business days.
The NAV on liquid funds is calculated on all 365 days. This feature gives liquid funds an advantage over debt funds.
The Verdict – Which is Better?
Both debt funds and the liquid fund have their pros and cons as enlisted above. The decision to invest in either of them should be based on the following factors:
You can also connect with Ajmera x-change, a leading investment and portfolio management company. We can offer you practical and customized financial advice to help you invest in any type of market fund, including liquid and debt funds.
Get in touch with us to make the right investment.