Liquid Mutual Funds Vs Liquid ETFs in 2025 – Which Should Indian Investors Choose?

Parking short-term money used to be straightforward—open a liquid mutual fund, invest, and let it grow quietly.

But with the rise of Liquid ETFs, particularly Nippon’s Liquid BeES and other AMCs launching similar products, a new question has emerged:

• Are ETFs cheaper and more efficient than liquid funds?
• Are they better for parking emergency funds?
• Is there a catch hidden behind the lower expense ratio?

If these questions sound familiar, you’re not alone.

Many Indian investors are debating whether to switch to ETFs for short-term money parking. Let’s break it down, one layer at a time.

Table of Contents

1. What Exactly Are Liquid Mutual Funds?
2. How Liquid ETFs Work – And Why They’re Gaining Popularity
3. NAV vs iNAV – The Transparency Gap Few Talk About
4. Taxation – Are There Any Advantages Left?
5. Liquidity Showdown – Where Investors Get Stuck
6. Costs, Premiums, and Discounts – The Hidden Return Killers
7. Risk Factors You Shouldn’t Ignore
8. Who Should Choose What – Retail vs Institutions
9. Key Takeaways – Choosing the Right Option for You
10. The Role of a CFP in Short-Term Money Management

1. What Exactly Are Liquid Mutual Funds?

Liquid mutual funds are designed for investors who need safety, liquidity, and slightly better returns than a savings account.

They invest in short-term instruments like:

• Treasury Bills
• Commercial Papers
• Certificates of Deposit

Why Investors Love Them

• Predictability: You always buy and redeem at the NAV—no surprises.
• T+1 Settlement: Money is credited to your bank account the next business day.
• Instant Redemption Option: Most AMCs allow instant withdrawal (up to ₹50,000 per day).

In short, liquid mutual funds are like a “parking lot” for money — safe, regulated, and transparent.

But are they being challenged by ETFs now?

2. How Liquid ETFs Work – And Why They’re Gaining Popularity

Liquid ETFs look attractive on paper because:

• They hold the same underlying assets as liquid funds.
• They have very low expense ratios.
• You can buy/sell them anytime during market hours.

But here’s the fine print:

• You need a Demat and trading account.
• Prices depend on market liquidity.
• You pay brokerage charges for each trade.

If you’re a retail investor, ask yourself: do you want to monitor bid-ask spreads every time you buy or sell?

3. NAV vs iNAV – The Transparency Gap Few Talk About

Mutual funds disclose NAV daily—public, permanent, and verifiable.

ETFs, however, give you:

• NAV: once a day, after market close
• iNAV: intraday indicative value, updated every 15 seconds

Sounds great, right? But here’s the issue—iNAV isn’t recorded historically.

You can’t go back and check if the ETF traded at a discount or premium yesterday.
That means you could accidentally buy above iNAV or sell below iNAV and never know how much you lost in the process.

Transparency-wise, mutual funds are still one step ahead.

4. Taxation – Are There Any Advantages Left?

Before April 2023, debt mutual funds enjoyed indexation benefits if held for 3+ years.

This made them extremely tax-efficient.

But from FY 2023-24 onward, both liquid mutual funds and ETFs are taxed the same way:

• Gains = Taxed as per your income slab
• No long-term vs short-term distinction

In other words, taxation is no longer the differentiator. The decision now boils down to execution, liquidity, and convenience.

5. Liquidity Showdown – Where Investors Get Stuck

Liquidity is where theory and reality clash.

On paper, both Liquid Mutual Funds and Liquid ETFs let you access your money quickly.

But do they really work the same way in practice?

Liquid Mutual Funds: Smooth & Predictable

• Guaranteed NAV-based redemption: You never worry about who is buying or selling. The AMC takes care of it.
• T+1 settlement: Redeem today, get money in your bank account the next working day.
• Instant redemption options: Some AMCs even offer instant credit (up to ₹50,000 per day per PAN). That means if you need cash at midnight for a medical emergency, you can get it in seconds.

Liquid ETFs: Market-Dependent and Less Reliable

• Liquidity depends on the exchange: You must find someone willing to buy your units at a fair price.
• Thin trading volumes: Low participation can create wide bid-ask spreads — sometimes costing you more than a day’s worth of returns.
• Execution timing matters: What if you need money on a holiday or after-market hours? You’ll have to wait for the next trading session.

Now ask yourself: if this is your emergency fund, do you really want to depend on whether enough buyers are present at 2:30 PM on a random Tuesday?

Liquidity is where the real difference shows up:

Factor	Liquid Mutual Funds	Liquid ETFs
Buy/Sell Price	Always at NAV	Depends on market price (may have premium/discount)
Liquidity Source	Fund house	Exchange participants (buyers/sellers)
Redemption	T+1 or instant (up to limit)	T+1 (only if you find a counterparty)
Market Timing Needed?	No	Yes – must trade during market hours

So, if you need your emergency money at midnight or on a holiday, liquid ETFs won’t help.

6. Costs, Premiums, and Discounts – The Hidden Return Killers

Yes, Liquid ETFs usually advertise lower expense ratios than mutual funds.

But do they really save you money once everything is factored in?

The Cost Puzzle

• Brokerage Charges: Every ETF buy/sell involves brokerage. For small investors, this can eat up the so-called cost advantage.
• Premiums and Discounts: ETFs sometimes trade at a price higher (premium) or lower (discount) than their fair value (iNAV). If you buy at a premium and later sell at a discount, your actual returns may turn out worse than a mutual fund investor holding the same portfolio.
• Impact Cost: Large trades can push the price up or down, reducing your realized return.

The “cheaper than mutual funds” argument only works if you trade in perfect market conditions — which rarely happens in India’s relatively shallow ETF market.

7. Risk Factors – The Hidden Side of ETFs

Many investors assume “liquid” means “risk-free.” But here are risks most people overlook:

• Liquidity Risk: In low-volume markets, you might have to sell at a steep discount just to exit.
• Execution Risk: You must place trades during market hours and monitor iNAV to avoid overpaying.
• Tracking Risk: Thin volumes and price inefficiencies can make ETF performance deviate from the underlying portfolio return.

For emergency money, you should aim for zero surprises. Why add these moving parts?

8. Who Should Choose What – Retail vs Institutions

Here’s a simple framework to decide:

Retail Investors

• ✔️ Prefer Liquid Mutual Funds for their emergency corpus or short-term savings.
• ✔️ Benefit from simplicity—no Demat account, no price tracking, no execution risk.
• ✔️ Get guaranteed liquidity and predictable outcomes.

Institutions & HNIs

• ✔️ Can use Liquid ETFs if they trade in large blocks, have access to market makers, and require intraday liquidity.
• ✔️ Use ETFs as collateral for derivatives or treasury operations.

For everyday investors, liquid funds remain a hassle-free and reliable choice.

9. Key Takeaways – Choosing the Right Option for You

• Both products invest in safe, short-term debt instruments.
• Tax treatment is identical after April 2023 — no advantage for either.
• Mutual funds guarantee NAV-based redemption, while ETFs expose you to execution risk.
• ETFs may look cheaper but hidden costs (spreads, premiums, brokerage) can erode returns.

Bottom line? If peace of mind is your goal, liquid mutual funds win hands down.

10. The Role of a CFP in Short-Term Money Management

Many investors think, “It’s just short-term money — how hard can it be?”

But mistakes like parking money in illiquid ETFs or chasing a slightly lower expense ratio can create real problems when you actually need that cash.

A Certified Financial Planner (CFP) can help you:

• Decide the right allocation between liquid assets and growth assets.
• Ensure your emergency fund is accessible when you need it most.
• Optimize your short-term plan without compromising long-term wealth creation.

When it comes to money meant for emergencies, professional advice is not a luxury — it’s a safety net.