Due to the rise in popularity of liquid funds in recent years, mutual fund investors always look for the Difference Between Debt Funds and Liquid Funds. Nevertheless, They may not realize that all liquid funds are debt funds, But all debt funds are not liquid funds. As a result, You cannot use them interchangeably.
Table of Contents
Introduction
Debt funds are a type of mutual fund that invests in a basket of debt or fixed-income securities. All of these assets have a unique maturity period and a unique risk level. liquid funds, on the other side, are a sub type of liquid funds. These funds put their money into assets with a limited duration of 91 days.
Let’s take a closer look at what Debt Funds and Liquid funds are to recognize the Difference Between Debt Funds and Liquid Funds.
What is Debt Funds?
Debt funds invest in a wide range of fixed-income securities. Treasury bills, government bonds, certificates of deposit, commercial paper, corporate bonds, and money market securities are examples of these assets. Debt funds are divided into several groups.
The maturity pattern of these funds is used to classify them. Liquid funds, short duration funds, ultra-short duration funds, gilt funds, and dynamic bond funds are among the 16 types of debt funds.
When opposed to equity funds, debt funds are thought to be less volatile. Debt funds may be a good choice if you’re looking to invest for a limited period of time and want to protect your wealth.
Nevertheless, This is not to suggest that debt funds are risk-free.
Risks in Debts Funds
- Interest rate risk: Debt funds invest in interest-bearing fixed income tools When interest rates increase these funds’ prices come down, and vice versa.
- Credit risk: Certain debt funds put their money into assets with a low credit rating. This suggests there’s a chance they won’t get paid on time from their traded assets.
- Default risk: Although uncommon, several funds may be exposed to a default risk if the bond issuer is unable to execute the required payment.
What is Liquid Funds?
Liquid funds are part of the debt fund segment. They put their money into fixed-income products with a maximum maturity of 91 days. As a result, liquid funds are regarded as a credible option to preserve your wealth in a savings account. You can also use liquid cash to keep a backup or crisis fund.
Difference Between Debt Funds and Liquid Funds
Let’s look at the difference between debt vs liquid funds based on some factors now that you’re more comfortable with liquid debt funds.
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Maturity Period
The primary and perhaps noticeable difference between liquid and debt funds is the maturity structure. Fixed-income liquid funds trade in assets with a maximum duration of 91 days. These assets are also maintained until they hit term.
Other types of debt funds, on the other hand, are exempt from this requirement. The duration structure of the debt fund’s traded assets differs substantially. Although some debt funds, including overnight funds, invest in overnight assets with a one-day maturity, others, including gilt funds, invest in treasury bonds with a 10-year maturity date.
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Liquidity
Liquid funds, as the name implies, allow for immediate redemption. Some AMCs allow liquid funds to be redeemed immediately. This implies you’ll have the money from the sale of your units in your account in 30 minutes. Other debt fund types are less liquid. Following a redemption order, maturity funds may take up to 2 business days to reach your account.
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Risk
In liquid funds, the risk factor is regarded to be at its lowest. This is partly due to the intrinsic assets’ short maturity periods. As a consequence, the interest rate and credit risks associated with these funds are extremely low. Debt funds, on the other hand, may have a significant level of interest rate and credit risk, as well as the possibility for comparable rewards.
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Returns
Liquid funds’ returns are regarded as steady since they generate consistent returns. Other debt funds, on the other hand, are thought to depend entirely on the nation’s interest rate changes.
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Tax
The liquid fund is a subset of the debt fund, the tax consequences of debt funds apply to liquid funds as well. In the scenario of debt funds, short-term capital gain applies if the investment is reclaimed within 3 years of the issue date, whereas long-term capital gain applies if the capital is returned after 3 years of the issue date.
Debt vs Liquid Funds
Basis | Liquid Funds | Debt Funds |
Maturity Period | The securities have a maturity range of less than or equivalent to 91 days. | The maturity pattern of financial funds does not have such a criterion. |
Returns | Returns are relatively stable. | Regularly change in response to interest rate conditions. |
Liquidity | high | low |
Risk | low | high |
Tax | Similar to Debt Funds | Short-term: Taxed according to specific slab rates. Long-term: Taxed at a rate of 20% with tax benefits. |
As a result, each fund has their own set of advantages and disadvantages. Individuals, nevertheless, must ultimately decide which plan to use.
Before investing in any plan, people must determine whether the fund’s aim is compatible with their own. Individuals should also thoroughly study the scheme’s features before participating in it.
They can even seek the advice of a financial advisor to verify that their investment generates the best possible results.
Conclusion
Knowing the debt vs liquid funds may assist you in making a more knowledgeable financial choice.
This is all from our side regarding the difference between debt funds and liquid funds. Let us know your views about liquid funds meaning in the comment section. To invest in Mutual funds open account now
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Liquid Mutual funds meaning
Liquid funds are part of the debt fund segment. They put their money into fixed-income products with a maximum maturity of 91 days. As a result, liquid funds are regarded as a credible option to preserving your wealth in a savings account. You can also use liquid cash to keep a backup or crisis fund.
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Liquid Funds meaning in Hindi
लिक्विड फंड डेट फंड सेगमेंट का हिस्सा हैं। उन्होंने अपना पैसा 91 दिनों की अधिकतम परिपक्वता के साथ निश्चित आय वाले उत्पादों में लगाया। नतीजतन, बचत खाते में अपने धन को संरक्षित करने के लिए लिक्विड फंड को एक विश्वसनीय विकल्प माना जाता है। आप लिक्विड कैश का इस्तेमाल बैकअप या क्राइसिस फंड रखने के लिए भी कर सकते हैं।