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Overnight Funds Vs Liquid Funds: What Is Better?

Overnight funds and liquid funds are used as short term pitstops to either park surplus cash or in a Systematic Transfer Plan (STP). Read this blog to know the differences between overnight funds and liquid funds. Find out how you can invest in the best overnight and liquid funds using Cube.
January 15, 2021

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While mutual funds are a long term investment option, there are certain funds like overnight funds and liquid funds that are used for the short term.

Investors have been known to park their surplus capital in an overnight fund or liquid fund because they offer better returns than a bank savings a/c or Fixed Deposit. 

However, both overnight funds and liquid funds are different in certain ways. This blog will help you understand these differences to know what is better: overnight funds or liquid funds.

What Are Overnight Funds?

Overnight funds are open-ended debt schemes. A typical overnight fund will invest in debt and money market instruments that mature overnight.

These debt and money market instruments can include:

  • Overnight reverse repo
  • Collateralized Borrowing and Lending Obligation (CBLO)
  • Bank deposits
  • Bills discounting

SEBI limits every overnight fund’s investments to low-risk debt securities. Thus, overnight funds are considered to be safer than liquid funds and other debt funds.

An overnight fund generates returns through the interest it earns from its overnight portfolio of investments. The returns generated are directly correlated to the state of interest rates:

  • High-interest rates, better overnight rates
  • Low-interest rates, lower overnight rates   

The overnight maturity of overnight funds ensures that credit and interest-based risks are near zero. However, overnight funds generate low returns of around 3-5%. 

Overnight funds do not charge an exit load even if you choose to redeem your investment in a day. This is a key reason why overnight funds have gained popularity.  

Read this blog to know more about overnight funds

What Are Liquid Funds?

Liquid funds are open-ended debt mutual funds. A typical liquid fund will invest in debt and money market instruments that mature in 91 days.

These debt and money market instruments may include:

  • Commercial Paper (CP)
  • Corporate bonds
  • Treasury bills
  • Government securities

Liquid funds are preferred as a short term investment due to the low portfolio maturity. The low lending tenure also ensures that there are minimal credit and interest-based risks.

Try the Risk Analysis feature under the Perfect Portfolio section of the Cube Wealth App to know which investment options are best for you.

Liquid funds generate higher returns of 4-7% than overnight funds. Moreover, liquid funds are far more consistent. However, liquid funds do charge an exit load for redemptions within 7 days.  

Read this to get a list of top 10 Best Liquid Funds 2021

Difference Between Overnight Funds And Liquid Funds

Overnight funds and liquid funds are quite similar in nature. The similarities between overnight funds and liquid funds are: 

  • Open-ended debt funds 
  • High liquidity 
  • Safer than other mutual funds
  • Quick portfolio maturity
  • Low expense ratio
  • Better returns than bank a/c
  • Better returns than bank FDs
  • Used in STPs

However, key details that may determine why you should pick an overnight fund instead of a liquid fund or vice versa lie in the differences.

Differences between overnight funds and liquid funds:

 

Parameter

Overnight Fund

Liquid Fund

Portfolio Maturity

1 day

91 days

Exit load

None 

Withdrawals < 7 days

Returns

3-5%

4-7%

Min. investment amount on Cube

₹5000

₹1000

Note: All facts & figures are as of 15-01-2021. Figures mentioned in the table above comprise publicly available data on Google. While we update our blogs regularly, check the Cube Wealth app for the latest facts & figures.

Download the Cube Wealth app to know more about overnight funds and liquid funds. 

What Is Better: Overnight Funds Or Liquid Funds?

Both overnight funds and liquid funds are relatively safe compared to other mutual funds. Moreover, both funds have a low expense ratio and offer high liquidity.

But liquid funds charge an exit load for redemptions within 7 days while overnight funds do not. Additionally, overnight funds generate lower returns than liquid funds.

Whether or not you should invest in overnight or liquid funds would depend on your investment goals and if you want to use either fund for a Systematic Transfer Plan (STP). Consult a Cube Wealth Coach to know more.

The Cube Wealth app helps you invest in the best overnight and liquid funds with expert advice from Wealth First, Cube’s mutual fund advisor, who curates a list of the best mutual funds for Cube users. 

Download the Cube Wealth app to invest in the best overnight and liquid funds in India for 2021. 

Watch this video to know the benefits of hand-picked mutual funds




Shriram Shekhar
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.

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