Liquid Funds Vs Debt Funds: Which Should You Choose
24 Aug 2021

Liquid Funds Vs Debt Funds: Which Should You Choose

Understanding the key differences between liquid vs debt funds can help you make informed investment decisions.

Key Takeaways

  • A Liquid Fund is a Type of Debt Mutual Fund.
  • Like all debt mutual funds, Liquid Funds invest in fixed-income or returns-generating securities.
  • All liquid funds are debt funds, but all debt funds are not liquid funds.
  • Liquid funds typically come with a maximum maturity period lasting 91 days.
  • The Net Asset Value of a liquid fund does not fluctuate frequently.

As an aspiring investor in the market, you may already be aware of the concepts of debt mutual funds in general. These are funds that primarily invest in securities like government and corporate bonds, treasury bills, certificates of deposits, money market instruments, etc. Investors typically prefer debt funds because they generate a fixed source of income or returns. The Securities and Exchange Board of India (SEBI) has categorised debt mutual funds into 16 categories: liquid funds. Let us compare liquid funds vs debt funds.

Liquid Funds Vs Debt Funds

Liquid funds are subsets of debt funds with a maturity period of 91 days. However, debt funds may come with varying maturity periods lasting from 1 day up to 10 years. Also, you can liquidate or exit a liquid fund easily, with redemption within 30 minutes. However, it typically takes T+2 days to exit a debt fund.  Below, we have highlighted the fundamental differences between debt vs liquid funds can help you make informed investment decisions.

Comparison Factor

Liquid Funds

Debt Funds

SEBI Categorisation

One of the 16 subsets of debt funds, as categorised by SEBI, includes overnight funds, long-duration funds, focused funds, etc.

One of the 16 subsets of debt funds, as categorised by SEBI, includes overnight funds, long-duration funds, focused funds, etc.

Maturity profile

Liquid Funds have a maximum maturity profile of up to 91 days.

The maturity profile varies based on the type of debt fund you choose. E.g., an overnight debt fund has the shortest investment horizon of 1 day to gilt funds with a constant 10-year duration.


Liquid funds offer easy redemption. Some AMCs even offer instant redemption facilities to get cash in your account within 30 minutes of redeeming the liquid fund.

You cannot liquidate debt funds until their maturity term. Also, it may take T+ 2 days for you to receive the redeemed funds into your account.


Liquid funds could prove to be risky investments due to the short maturity. If the market falls severely during the investment tenure, you stand to lose your money.

Long duration debt funds may help you generate better risk-adjusted returns since the market can significantly change in 1-10 years. You can invest in short, medium, and long-duration debt funds and mitigate your risks.

Liquid Funds Vs Debt Funds- Which One Should You Pick?

Investing in debt funds is an ideal option when you are looking for long-term investments. They offer better tax-saving benefits, making them desirable for investors in the higher income tax brackets. The short investment tenure makes a liquid fund a considerably volatile and unpredictable investment in that you could earn higher returns, lose a part of your capital, or accrue meagre returns based on market movements and sentiments. A liquid fund could prove more profitable in a bull market than any debt fund with higher durations. It also helps you achieve your shortest-term goals, as compared to most other debt fund types.


Both liquid and debt mutual funds are popular amongst new investors primarily because of the security risks these funds offer as compared to equity mutual funds and other equity-related investments. Irrespective of which fund you choose to invest in, you should weigh the investment against your investment goals, risk appetite, and preferred investment duration.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.