Overnight funds and liquid funds - What is the difference?

overnight fund vs liquid fund
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When it comes to investing in mutual funds, it's essential to understand the various types available and how they can align with your financial goals. By exploring their characteristics and differences, you can gain a better understanding of these investment options and make informed decisions. In this article, we will look at two commonly types of mutual funds: overnight funds and liquid funds.

What are liquid funds?

Liquid mutual funds are a type of debt fund that primarily invest in highly liquid and relatively low-risk instruments, such as treasury bills, certificate of deposits, commercial papers, and other short-term debt securities. These funds have a short maturity period, usually ranging from a few days to a few months with maximum maturity up to 91 days. Liquid funds aim to provide investors with easy access to their funds while generating reasonable returns.
Liquid funds can prove to be an attractive option for parking surplus funds. You can consider investing in Bajaj Finserv Liquid Fund managed by Bajaj Asset Management Limited. The objective of this fund is to provide a level of income consistent with the objectives of preservation of capital, lower risk and high liquidity through investments made primarily in money market and debt securities with maturity of up to 91 days only. There is no assurance that the investment objective of the scheme will be achieved.

What are overnight funds?

Overnight funds are a specific category of debt mutual funds that invest in very short-term instruments with an extremely short maturity period. As the name suggests, these funds invest in instruments that mature overnight, usually within 1 business day. Overnight funds primarily invest in securities like Tri-party repo (TREPS), Government repo/reverse repo (in Government securities) Treasury Bills, and other overnight money market instruments.
The primary objective of overnight funds is to provide investors reasonable returns commensurate with low risk and high level of liquidity, through investments made primarily in overnight securities having maturity of 1 business day. There is no assurance that the investment objective of the scheme will be achieved. If you are an investor, looking to park idle cash to generate returns over and above current account, you can consider investing in Bajaj Finserv Overnight Fund.
Overnight funds are considered even more conservative than liquid funds due to their focus on very short-term instruments. Similar to liquid funds, overnight funds also offer high liquidity, allowing investors to enter or exit the fund at any time.

Overnight funds and liquid funds: The difference?

One may then ask, who wins the overnight fund vs liquid fund battle? While both overnight funds and liquid mutual funds fall under the category of debt mutual funds and share similarities in terms of liquidity and investment objectives, there are some key differences between the two.

  • Investment horizon: Liquid funds typically have a slightly longer investment horizon compared to overnight funds. Liquid funds invest in short-term instruments with maturities ranging from a few days to a few months with a maximum of 91 days, providing investors with flexibility in terms of investment duration. On the other hand, overnight funds focus on instruments that mature within 1 business day, making them suitable for investors with an even shorter investment horizon.
  • Return potential: Due to their investment strategies, liquid funds tend to offer relatively better return potential compared to overnight funds. Liquid funds invest in a broader range of short-term debt instruments, which may include slightly higher-risk securities, potentially translating into higher returns. In contrast, overnight funds primarily invest in relatively low-risk and highly liquid instruments, which limits their return potential but enhances their relative stability.
  • Risk profile: Liquid funds and overnight funds are both considered low-risk investment options. However, overnight funds are generally perceived as the lowest risk among debt mutual funds due to their focus on highly stable overnight instruments. Liquid funds may carry a little more volatility as compared to overnight funds, although the risk is still relatively low compared to other mutual fund categories.
  • Volatility: As overnight funds invest in extremely short-term instruments, they are less exposed to market volatility. On the other hand, liquid funds, while still relatively stable, may experience slight fluctuations in NAV (Net Asset Value) due to changes in the underlying debt securities' market conditions. Thus, the degree of volatility in liquid funds may be higher than that of overnight funds, although it is still significantly lower compared to equity-oriented mutual funds.
  • Exit load: While liquid fund has an exit load for up to 7 days, overnight fund does not have any exit load.

In conclusion, both overnight funds and liquid funds can be suitable investment options for individuals looking for short-term investment avenues with high liquidity and relatively low risk. While liquid funds offer slightly higher return potential due to their broader investment horizon, overnight funds focus on extremely short-term and secure instruments, making them the lowest risk category within debt mutual funds.


Are overnight funds a stable investment option?

Overnight funds are relatively less risky than other debt funds since they have near-zero credit risk and zero interest rate risk. This is because securities that mature in one day are highly unlikely to default on interest payments. Furthermore, depending on the fund company, the amount of investment can be as low as Rs.1000.

Are liquid funds risky?

Mutual fund risk is related to volatility in net asset value (NAV). The NAV of liquid funds does not usually move too frequently because the underlying assets have a maturity of up to 91 days, preventing the fund's NAV from being greatly impacted by fluctuations in the underlying asset price.

When should you opt for liquid or overnight funds?

The choice between any fund is determined by your investing objectives, liquidity requirements, and risk tolerance. However, if you are looking for an investment for a short-term then you can opt for these funds.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.