Liquid fund vs debt fund: Which one to choose?
There are numerous popular mutual fund variants available in India. Two popular variants of mutual funds are liquid funds and debt funds. Both debt and liquid funds are well-suited for a short-term mutual fund investment. Also, these two types of mutual funds have different benefits from each other. Learning the differences between these two will help you choose the right mutual fund for your wealth creation goals. However, before looking at the differences, you must learn what each of these funds are.
Liquid funds invest in short-term debt instruments that are highly liquid, for example, treasury bills and commercial papers. You might get your principal amount back in approximately 91 days by opting for a liquid fund investment. They invest in short-term debt instruments. Therefore, the risk associated with a liquid fund is comparatively low.
Debt funds, like liquid funds, allocate funds to financial securities that generate a fixed income. Government bonds, commercial paper, and corporate bonds are examples of fixed-income securities. They are ideal for medium to low-risk appetite investors with a longer investment horizon. Consider investing in these funds to enjoy solid returns and diversification benefits.
Liquid vs debt funds:
Debt funds are one of the variants of mutual funds.On the other hand, liquid funds are a variant of debt funds. These funds differbased onthe investment horizon, liquidity, and risk appetite.
· Investment Horizon:
The investment horizon is a deciding factor in the difference between a debt and a liquid fund. Liquid funds have a maturity of approximately 91 days. Debt mutual funds,on the other hand, don’t have a particular investment horizon. Investment horizons in debt funds can vary between short-, medium-, or long-term. It depends on your preference.
Liquid and debt funds differ from the perspective of liquidity. Liquid funds are open-ended, which means they are redeemable any time you want without any charges. Other debt fund variants are not liquid and can be redeemed only after the business cycle of the following day. Invest in debt funds after looking up the average maturity of the scheme.
· Risk appetite:
Even if debt and liquid funds are suitable for risk-averse investors, liquid funds are comparatively less risky because they are for short-term periods. Make a short-term investment to maintain liquidity for urgencies. Debt funds have high credit risk and interest rate risk. Slight uncertainty is attached to debt mutual funds because of the longer duration.
· Stability of returns:
Returns in liquid funds are relatively more stable because of their short-term duration. Hence, market interest rate movements have less impact on the returns. Debt funds can hold securities for a longer time. Therefore, they are likely to be affected by interest rate movements.
Debt and liquid funds both come with numerous benefits for investors. No rule is set in stone when deciding the right mutual fund option between these two. Choose a fund after ascertaining the investment horizon, risk, returns, and liquidity. Also, please determine the required investment amount. Get the required monthly investment amount by using the SIP calculator.