Liquid Funds vs Debt Funds: Which is Better?

Most people are still confused about the difference between the Debt Fund and Liquid Funds. It’s not the case, though. Debt funds apply to the segment of the Mutual Fund that invests in fixed income securities through the pooling of funds. The liquid fund is a type of debt fund scheme that invests the money in fixed securities with a brief maturity period. Although debt fund is the parent category and the liquid fund is also a subset of it; there is a lot of difference between liquid funds and other types of Mutual Fund fixed-income schemes.

So, via this post, let us understand the differences between liquid funds and debt funds concerning various criteria such as returns, risk, underlying asset portfolio and much more.

Debt funds

Debt funds invest in several securities at a fixed interest. Those include treasury bills, government bonds, deposit certificates, trading paper, corporate bonds, and money market instruments. There are various debt-fund types. Those funds are listed according to the maturity profile. There are also 16 types of debt funds, including liquid funds, short-term funds, ultra-short-term funds, gilt funds, and dynamic bond funds.

Debt mutual funds are considered less risky compared to bond funds. When you invest with a limited time, where capital security is your main target, debt funds may be an ideal choice. That is not to mean though, that debt funds are risk-free.

Liquid funds

Liquid funds make up one of the debt funds groups. They invest in instruments of fixed income for no more than 91 days to mature. Therefore, liquid funds are used as an alternative rather than keeping the money idle in a savings account. You should also find liquid assets for contingency or emergency fund management purposes.

Difference between debt and liquid funds

Maturity

The first and clearest distinction that can be made between liquid and debt funds is focused on the maturity profile. Liquid funds invest in fixed-revenue securities with a 91-day average maturity period. Furthermore, these securities are held until maturity. Nevertheless, in the case of certain types of debt funds, this limitation does not apply. The maturity profile of underlying debt fund securities varies greatly. Although there are bond funds, such as overnight funds, that invest in overnight securities with a one-day maturity, there are gilt funds that invest in ten-year government securities.

Liquidity

The liquid fund provides fast redeeming facilities. Some AMCs offer liquid funds instant redemption facility. This means you can get the cash from liquidating your units into your account within 30 minutes. Many debt fund groups are not as liquid as these. After placing a request for redemption, maturity proceeds will take up to two working days to come to your account.

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