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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.

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.

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




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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