Discover the key differences between Liquid Funds vs Bharat Bond ETFs. This guide reviews performance & helps you choose the ideal investment for your portfolio.
Looking for the best low-risk option to invest your money? You’ve likely encountered both Liquid Funds and Bharat Bond ETFs, but choosing the right one for your portfolio can be confusing. While both are fixed-income investments, they serve very different purposes depending on your investment horizon, liquidity needs, and risk tolerance. In this comprehensive side-by-side review, we’ll break down the key differences between liquid funds and Bharat Bond ETFs, compare their top performance, and provide a clear guide to help you decide which is the smarter choice for your financial goals.
Based on market data as of early September, here is a side-by-side comparison of liquid funds (including liquid ETFs like LIQUIDCASE) and Bharat Bond ETFs, along with top-performing funds in each category.
Disclaimer: Past performance is not indicative of future returns. Investment decisions should be based on your personal financial goals, risk tolerance, and liquidity needs. It is advisable to consult a financial advisor before investing.
Side-by-side comparison: Liquid funds vs Bharat Bond ETFs
Feature | Liquid Funds | Bharat Bond ETFs |
|---|---|---|
Primary Goal | Provides high liquidity and a modest return for short-term parking of funds, typically from one day up to three months. | Offers potentially higher, fixed-maturity returns by holding high-credit-quality PSU bonds until maturity. Best for medium to long-term goals. |
Underlying Assets | Very short-term debt instruments like Treasury Bills, Commercial Papers, and Certificates of Deposit with a maturity of up to 91 days. | A portfolio of bonds from public sector undertakings (PSUs), which have a specific maturity date, e.g., April 2030 or April 2031. |
Risk Profile | Low to Moderate. The risk is very low due to the short maturity of underlying assets, but it is not entirely risk-free. | Low to Moderate. Primarily exposed to interest rate risk, which is higher for longer-duration ETFs. High-credit-quality assets keep credit risk low. |
Liquidity | Very High. Redemptions are typically processed within one working day. Some liquid ETFs offer intraday liquidity on stock exchanges. | High (on-exchange). ETFs are traded on stock exchanges, providing intraday liquidity. |
Return | Moderate. The returns are generally linked to short-term interest rates and typically fluctuate between 6% and 7% based on current rates. | Potentially Higher. Returns are more predictable over the full investment horizon if held to maturity. Current annualized yields range from 7% to 9% depending on the maturity date. |
Taxes | Taxed at your slab rate for gains realized within 3 years. LTCG with indexation applies after 3 years. | Taxed at your slab rate for gains realized within 3 years. LTCG with indexation applies after 3 years. |
How to Invest | Can be invested in directly with the AMC, through platforms like Groww, or through a demat account for liquid ETFs like LIQUIDCASE. | Requires a demat account to buy and sell on a stock exchange. Alternatively, a Fund of Fund (FOF) version is available for those without a demat account. |
Top performance in each category (as of early September)
Top-performing liquid mutual funds (Direct Plans)
These funds are selected based on their 1-year and 3-year returns, AUM, and consistent performance:
- Aditya Birla Sun Life Liquid Fund Direct – Growth:
1-year return: 7.04%and3-year return: 7.14%. - Axis Liquid Fund Direct – Growth:
1-year return: 7.05%and3-year return: 7.12%. - ICICI Prudential Liquid Fund Direct – Growth:
1-year return: 6.98%and3-year return: 7.06%. - Mahindra Manulife Liquid Fund Direct – Growth:
1-year return: 7.01%and3-year return: 7.12%. - Edelweiss Liquid Fund Direct – Growth:
1-year return: 7.03%and3-year return: 7.13%.
Top-performing Bharat Bond ETFs
Returns vary depending on the target maturity date of the ETF:
- BHARAT Bond ETF – April 2030 – Growth:
- 1-year return:
8.9% - 3-year return:
8.02% - 5-year return:
6.71%
- 1-year return:
- BHARAT Bond ETF – April 2031 – Growth:
- 3-year return:
7.82%
- 3-year return:
Choose Liquid Fund vs Bharat Bond ETF: Top Performance Analysis
Deciding between a liquid fund (like those used for emergency funds) and a Bharat Bond ETF depends entirely on your investment goals, time horizon, risk tolerance, and tax considerations.
In essence: Liquid funds are best for parking money safely for a very short duration (days to a few months) with instant access, ideal for emergencies or temporary cash management. Bharat Bond ETFs are better for specific medium-to-long-term goals, offering more predictable and potentially higher returns with tax advantages when held to maturity, but require a Demat account and are less suited for instant access.
Here’s a breakdown to help you choose:
Choose Liquid Funds if
- You need high liquidity: Liquid funds allow quick access to your money, often within 1 business day or even instantly up to certain limits. They are ideal for building an emergency fund that might need to be accessed on short notice.
- Your investment horizon is short (up to 3 months): They invest in very short-term debt instruments (maturing in up to 91 days), providing stability and minimal interest rate risk.
- You’re comfortable with slightly lower returns: They typically offer returns of 6% to 7%, outperforming traditional savings accounts but potentially less than long-term debt options.
- You are a low-risk investor: Liquid funds prioritize capital preservation due to their short duration and high-quality underlying securities.
- You don’t want a Demat account or prefer easy transactions: You can invest directly with the fund house or through online platforms without needing a Demat account.
Choose Bharat Bond ETFs if
- Your investment horizon is medium to long term (3+ years): These are target maturity funds designed to be held until a specific maturity date, like April 2030 or 2032.
- You seek predictable, potentially higher returns: Holding them until maturity offers more predictable returns than actively managed funds, potentially outperforming liquid funds over the long term. Current yields are in the 7-9% range, depending on the maturity.
- You want inflation-beating returns with high safety: They invest in AAA-rated bonds of Public Sector Undertakings (PSUs), which have low credit risk due to government backing.
- You want potential tax efficiency: Holding for more than 3 years allows you to claim a 20% tax rate after indexation benefits. (Note: The indexation benefit for liquid funds has been removed post-April 1, 2023.)
- You have a Demat account and are comfortable with exchange-traded investments: They are bought and sold on a stock exchange, requiring a Demat account.
Bharat Bond ETF: Top Performers & Comparison
As of September, the top-rated bond ETFs in India are primarily government-backed target maturity funds known as Bharat Bond ETFs
Their high credit quality and predictable returns have made them popular among conservative investors.
Top-rated bond ETFs in India
The following ETFs are considered top-rated based on performance, low expense ratios, and asset quality.
Bharat Bond ETFs (managed by Edelweiss AMC)
These target maturity ETFs invest in AAA-rated public sector undertakings (PSU) bonds and offer highly predictable returns when held to maturity.
- BHARAT Bond ETF – April 2030: This ETF has delivered strong historical returns and has one of the largest asset sizes in its category.
- 1-year return: 8.90%
- 3-year return: 8.02%
- 5-year return: 6.71%
- BHARAT Bond ETF – April 2032: For investors with a slightly longer investment horizon, this fund has consistently delivered robust performance.
- 1-year return: 8.69%
- 3-year return: 8.12%
Other notable bond ETFs
- LIC MF Nifty 8-13 yr G-Sec ETF: Tracks the Nifty 8-13 year G-Sec index, providing exposure to medium-to-long-duration sovereign securities. It has shown impressive long-term performance with a low expense ratio.
- 1-year return (as of Dec 2024): 10.61%
- Nippon India ETF Nifty SDL Apr 2026: Provides exposure to State Development Loans (SDLs) from various Indian states, offering diversification.
- 1-year return (as of Dec 2024): 8.00%
How to choose the right bond ETF
To determine the best bond ETF for your portfolio, consider these factors:
- Investment horizon: Target Maturity Funds like the Bharat Bond ETFs are ideal if you know your financial goal date. For a long-term goal, a longer-duration ETF may offer higher returns but also carry greater interest rate risk.
- Credit quality: The majority of top Indian bond ETFs invest in sovereign or AAA-rated PSU bonds, which carry minimal credit risk. Always check the portfolio to ensure the fund aligns with your risk tolerance.
- Expense ratio: Bond ETFs are known for their low expense ratios, which directly boosts your net returns. Bharat Bond ETFs, in particular, are exceptionally cost-effective.
- Liquidity: ETFs are traded on stock exchanges, providing intraday liquidity. Funds with higher Asset Under Management (AUM) often offer better liquidity.
Conclusion
Ultimately, your choice between a liquid fund and a Bharat Bond ETF hinges on a single question: what is your investment goal? For short-term needs like building an emergency fund or parking surplus cash for a few months, the stability and rapid liquidity of a liquid fund are unmatched. However, if your goal is to invest for a medium-to-long term (3+ years) and you seek predictable, higher returns with low credit risk, the Bharat Bond ETF is a far more suitable option.
Remember to consider your specific financial objectives, review the top performers in each category, and align your investment with your time horizon. The key is not to view these as competing products, but as powerful tools for different situations within a balanced investment strategy.