Difference between liquid funds and debt funds

Published: Wednesday, October 23, 2013, 14:33 [IST]

Liquid fund, which are a type of debt fund, invest in securities with lower maturity term of a maximum of 91 days give investors high liquidity. And other than the liquidity factor, such funds differ from debt funds in several ways. Here is a table illustrating all such differences :-

S.no	Point of difference	Liquid Funds	Debt funds
1	Portfolio	Invest in instruments with maximum maturity of 91 days. Bank CDs, Bank FDs, treasury bills, bill rediscounting, commercial papers and other debt securities with maturity term of 91 days	No such restriction. So invest in a mix of debt and money market instruments with short and long term investment horizon.
2	Risk	Such funds carry very low risk in terms of both interest rate and credit risk. For shorter maturity term, interest rate generally remain same.	Risk with respect to interest rate fluctuation can be higher and credit risk also needs to be evaluated before parking in the funds.
3	Returns	As in the shorter term probability of interest rate fluctuation is less, liquid funds generate stable returns.	Yields and returns are likely to change depending on the economic scenario
4	Difference in terms of NAV value determination	NAV is calculated for all 365 days	NAV is determined only for business days
5	Allotment of mutual fund units	Irrespective of the amount, if the funds as well as the order is placed before the cut off time of 2pm, investors are allotted units based on the previous day NAV.	Value of investment holds importance. If the investment amount is upto 2lacs and realized within the cut-off time of 3pm, NAV of the day end is used for unit allocation. For higher amount, allotment is done on the basis of fund realization.
6	High liquidity	With the credit of redemption amount on the next business day, liquid funds offer incomparable liquidity	Other debt funds not as liquid as liquid funds