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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.
April 18, 2024

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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. You can consult a Cube Wealth Coach or download the Cube Wealth App.

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.

As per historical data, liquid funds are known to generate returns in the range of 4-7% which is better than overnight funds.

Moreover, liquid funds are far more consistent. However, liquid funds do charge an exit load if you withdraw your investment 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.

Overnight Funds Vs 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 01-07-2021. Figures mentioned in the table above comprise publicly available data on Google.

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.

However, liquid funds are better in terms of returns but overnight funds are safer and do not charge an exit load. The choice is tough, that's why it would be wise to consult a trained expert to make an informed decision. You can consult a Cube Wealth Coach or download the Cube Wealth App.

For example, both liquid funds and overnight funds could be an option if you're investing in mutual funds through a Systematic Transfer Plan (STP).

An expert can tell you which one you should invest in based on specific metrics like the duration, desired returns during the said duration, and more.

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

FAQs 

1. What are liquid funds?

Ans. Liquid funds, like overnight funds, are also a category of mutual funds that invest in short-term debt securities. However, they have a slightly longer maturity duration, typically up to 91 days. Liquid funds are often chosen for their liquidity and safety features.

2. What are the key differences between overnight funds and liquid funds?

Ans. The primary difference is the maturity period of the underlying securities. Overnight funds invest in extremely short-term instruments with a one-day maturity, while liquid funds invest in slightly longer-term securities with maturities of up to 91 days. Liquid funds may offer marginally higher returns but still maintain a high degree of liquidity and safety. You can consult a Cube Wealth Coach or download the Cube Wealth App.

3. Which is better for short-term investments or emergency funds?

Ans. For extremely short-term investments, especially those with an investment horizon of a day or two, overnight funds can be suitable. For slightly longer-term needs and emergency funds, liquid funds may offer slightly higher returns without compromising liquidity.

4. Are there any tax differences between overnight funds and liquid funds?

Ans. Both overnight funds and liquid funds are taxed similarly in India. Short-term capital gains (if redeemed within three years) are added to the investor's income and taxed according to their applicable income tax slab. Long-term capital gains (if held for more than three years) are taxed at 20% with indexation benefit.

Conclusion

The choice between overnight funds and liquid funds depends on your specific investment needs and the desired investment horizon. Both of these categories offer a high degree of liquidity and safety, making them suitable for short-term investments and parking emergency funds.

Overnight funds are designed for extremely short-term investments, often with a one-day horizon. They are ideal for parking funds overnight and may offer slightly lower returns due to the ultra-short maturity of their underlying securities.


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Priya Bansal
Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.

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