Overnight funds and liquid funds - What is the difference?


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 popular types of mutual funds: overnight funds and liquid funds.
- Table of contents
- What are liquid funds?
- What are overnight funds?
- Difference between overnight funds and liquid funds
- Overnight Funds vs Liquid Funds: Which Is Better?
- What is the time horizon and minimum investment amount?
- Which one should you select - Overnight funds vs. Liquid funds?
What are liquid funds?
Liquid mutual funds are a type of debt fund that primarily invests in highly liquid and relatively low-risk instruments, such as treasury bills, certificates 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 a maximum maturity of 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 the 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 category of debt mutual funds that invest in very short-term instruments that mature overnight, usually within 1 business day. These include tri-party repo (TREPS), government repo/reverse repo (in government securities) treasury bills, and other overnight money market instruments.
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.
The primary objective of overnight funds is to provide investors with 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 your current account, you can consider investing in the Bajaj Finserv Overnight Fund.
Difference between overnight funds and liquid funds
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. Here’s a table comparing liquid and overnight funds:
Feature | Liquid Funds | Overnight Funds |
---|---|---|
Investment Horizon | Maturities range from a few days to a maximum of 91 days | Invests in instruments maturing within 1 business day |
Return Potential | Better return potential than overnightfunds due to investment in a broader range of short-term debt instruments | Lower return potential as investments are in highly liquid, low-risk instruments |
Risk Profile | Low-to-moderate risk, slightly higher risk profile than overnight funds due to exposure to short-term debt instruments | Lowest risk among debt funds due to highly stable overnight instruments |
Volatility | Slightly higher volatility compared to overnight funds but still relatively stable | Minimal volatility due to investment in overnight securities |
Overnight funds vs liquid funds: Which is more suitable?
Overnight funds may be more suitable if you need to park funds for an extremely short duration, such as overnight or a few days, and prioritise high liquidity and low risk. Liquid funds might be more suitable if you have a slightly longer investment horizon (a few days to a few months) and are looking for slightly better potential returns compared to overnight funds while still maintaining a relatively low risk profile.
What is the time horizon and minimum investment amount for both funds?
Both liquid and overnight funds are suitable for parking surplus cash or for short-term goals such as building an emergency corpus. Minimum investment amounts can vary based on the asset management company. Some funds may have a minimum investment as low as Rs 100 or Rs. 500, while others may require a higher amount.
Overnight funds vs. liquid funds: Which one should you select?
Choosing between overnight funds and liquid funds depends entirely on your specific needs and circumstances. There's no universally "better" option; the suitability hinges on factors like your investment horizon, liquidity requirements, and risk tolerance.
Choose overnight funds if:
Extremely short-term need: You need to park money for a very brief period, such as overnight or a couple of days. This might be the case when you need to keep funds readily available for immediate use.
Minimal risk tolerance: You're extremely risk-averse and want only low risk avenues.
Need liquidity: It is suitable for those who need quick access to funds.
Choose liquid funds if:
Short-term horizon (days to months): You have a slightly longer investment horizon, ranging from a few days to a few months. This might be the case when you're saving for a planned expense in the near future, like a large purchase or a vacation.
Slightly better potential returns: You're willing to accept a marginally higher level of risk (which is still relatively low compared to other debt fund categories) to earn slightly better returns than overnight funds.
Need for high liquidity: While not as immediate as overnight funds, liquid funds still offer high liquidity, allowing you to redeem your investment and receive the funds within one business day.
Conclusion:
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. Investors considering starting a Systematic Investment Plan in a mutual fund can consider using an SIP investment calculator to assist their planning process
FAQs:
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 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 a short-term investment option, you can consider these funds.
What is the major benefit of investing in an overnight fund?
The primary benefits are high liquidity, relative stability of capital invested and the potential to earn better returns than savings accounts. These features makes them suitable for parking surplus cash for short periods while potentially earning slightly better returns than a savings account. However, savings accounts offer guaranteed returns and capital protection, while overnight funds, though low risk, are subject to market risk and returns are not guaranteed.
Do overnight funds and liquid funds have any tax implications?
Yes, both are taxed as debt mutual funds. Capital gains from overnight and liquid funds are taxed as per your income tax slab. Gains are added to your income and taxed accordingly.
What are the typical investment durations for overnight funds and liquid funds?
Both funds cater to very short-term goals, ranging from a few days to a few weeks or months. Both offer high liquidity.
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 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.