Overnight Funds vs Liquid Funds: Which Is Better?

In case you have some extra money and want to invest for the short term with an objective to maintain liquidity and get some return. There are various options available in the debt category of mutual funds. Among them, the most preferred investment options to park idle money are overnight and liquid funds.

In today’s blog post, we will give you an overview of overnight funds and liquid funds, along with their key differences.

What are Overnight Funds?

Overnight funds are a category of debt mutual funds that primarily invest money in fixed-income instruments with a maturity of just one day. As investments are made in very short-term debt instruments, the investor considers them the safest option to park their money.

Features of Overnight Funds

The key features of overnight funds are as follows:

1. One-Day Maturity: The overnight fund invests its money in securities that mature within one day.
2. Low Return: The returns are low because the maturity of the instrument is extremely short i.e. 1 day only and the amount gets reinvested daily.

3. Low Interest Rate Risk: The interest rate risk in the overnight fund is very low, as the funds are least affected by changes in interest rates.
4. Very Low Credit Risk: Overnight funds generally invest in high-quality debt instruments, reducing the risk of default.

What are Liquid Funds?

A liquid fund is a debt mutual fund offered by an asset management company which invests the money collected from the investor in fixed-income securities having a maturity of up to 91 days. The objective of these funds is to provide liquidity along with returns. It invests the money in instruments such as commercial papers, treasury bills, certificates of deposits, etc. A liquid fund offers a slightly better return than a savings account.

Features of Liquid Fund

The key features of a liquid fund are as follows:

1. Liquidity: Investment in a liquid fund is highly liquid. One can easily redeem their money, and the amount is credited to their bank account within one working day.
2. Better Returns: Liquid funds often yield higher returns than savings accounts. This makes it attractive for investors who keep their money idle in their bank accounts.
3. No Lock-in: Liquid funds do not come with any lock-in period. It allows investors to withdraw their money at any time.
4. Professional Management: Investments in liquid funds are managed by the asset management companies’ professional, experienced fund managers. 

Read Also: Liquid Funds Vs Ultra Short Fund: Which One Should You Choose?

Difference between Overnight and Liquid Funds

The key difference between overnight and liquid funds is as follows:

Particulars	Overnight Funds	Liquid Funds
Duration of Investment	The overnight funds invest in securities having a maturity of 1 day.	A liquid fund invests the money in debt securities having a maturity of up to 91 days.
Risk	These funds have the lowest risk among all other debt mutual funds.	A liquid fund also carries lower risk, but has higher risk than overnight mutual funds.
Volatility due to Interest Rates	There are no or low risks related to changes in interest rates on overnight funds.	Liquid funds generally have slightly higher interest rate risk than overnight funds due to longer maturity.
Returns	Overnight funds have the lowest returns.	Liquid funds post higher returns than overnight funds.
Default Risk	These funds have almost zero default risk.	As the securities have a slightly higher maturity, they carry a higher default risk.
Ideal Investment Duration	The investment in overnight funds is suitable for 1 to 7 days.	Investment in a liquid fund is suggested for 3 to 6 months.
Suitability	Investment in overnight funds is suitable for big institutions.	Liquid funds are suitable for retail or individual investors to park their money.
Expense Ratio	Overnight funds have a lower expense ratio.	Liquid funds have a slightly higher expense ratio than overnight funds.
Portfolio Turnover Ratio	Overnight funds have a higher portfolio turnover ratio as the money is reinvested every day.	Liquid funds have a moderate portfolio turnover ratio as the securities in the portfolio are held for a few periods.

Where should you invest your money: Overnight or Liquid Fund

The decision of whether to invest in the Overnight Funds or Liquid Funds largely depends on how long you want to invest and your preference for risk. When you want to invest for a very short time, say a few days, and you want to have maximum safety with almost no interest rate risk, then overnight funds may be an appropriate choice since they invest in securities that mature after only a single day. Alternatively, when you are looking at a period of a few weeks or up to a few months and aiming at relatively higher returns, and the risk is also not that high, liquid funds can be a better option. Overnight funds are mostly suitable for overnight parking of money, in simple terms, whereas liquid funds are best for short-term investments and emergency funds.

Read Also: ETF vs Index Fund: Key Differences You Must Know

Conclusion

On a concluding note, both overnight funds and liquid funds are suitable options for investors who want to park their money for the short term with an objective to earn a return with liquidity. These two funds are low risk and offer high liquidity, which typically means you can easily withdraw your money as needed. Overnight funds invest in securities that have a maturity of just one day, while liquid funds invest money in securities that have a maturity of up to 91 days. However, choosing among them depends on the investor’s risk profile and investment horizon; therefore, it is advisable to consult your investment advisor before making any investment decision. 

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