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Overnight funds vs. Liquid funds: Comparing short-term investment options

With interest rates on savings accounts and fixed deposits trending lower, short-term debt funds like overnight funds and liquid funds have emerged as attractive investment avenues for parking surplus cash. Both categories offer relatively stable returns along with easy liquidity. In this article, we compare overnight funds and liquid funds on parameters like returns, credit profile, liquidity, expenses etc. to understand which option works better for short-term investment needs.

Understanding overnight funds

Overnight funds are open-ended debt mutual fund schemes that invest in securities maturing in one day. They park money in highly liquid and low-risk instruments like treasury bills, certificate of deposits, commercial papers, repos, etc. overnight. The maturity period of investments is limited to 1 business day.

Overnight funds allow easy liquidity as the investor can get their money back the next business day. Returns are comparable to liquid funds but slightly lower given the ultra-short-term nature. Overnight funds are suitable for parking surplus cash for the short term.

Key features of liquid funds

Liquid funds are open-ended debt funds that invest in money market and short-term instruments. The maturity period of instruments ranges from 91 days to 182 days. Liquid funds have higher maturity than overnight funds but lower than ultra-short duration funds.

Liquid funds invest in commercial papers, certificates of deposit, treasury bills, repo, etc. They provide easy liquidity as investors can redeem units and get money back within 1-2 business days. Returns are slightly higher than overnight funds given the slightly higher maturity profile.

Assessing credit profile

Overnight funds invest in securities maturing in 1 day issued by reputed institutions and banks. Instruments like T-bills, repo, CDs of top banks have the highest credit ratings indicating negligible default risk. Liquid funds have slightly higher credit risk as they also invest in commercial papers of corporates along with T-bills and CDs.

However, the credit profile of liquid funds is also strong given diversified portfolios and investment only in top-rated instruments. On the credit front, both categories have low to moderate risk profiles.

Analyzing liquidity

Overnight mutual funds offer the highest liquidity among debt funds as the maturity is just 1 day. Investors can get their money back in their bank account the next business day. Liquid funds also offer high liquidity with redemption payments within 1-2 business days.

Both categories are suitable for parking surplus cash for the short term or as an emergency fund. Overnight funds score higher in terms of meeting immediate liquidity needs. But liquid funds also fare well on the liquidity parameter.

Evaluating expenses

Overnight funds tend to have lower expense ratios compared to liquid funds given the ultra-short term nature. Overnight funds have expense ratios in the range of 0.15% to 0.25% for the direct plan. Liquid funds have slightly higher expense ratios of 0.20% to 0.30% in general.

The difference is minor, but overnight funds score slightly better in terms of lower costs. The expenses are not a major differentiating factor between the two categories.


Overnight funds and liquid funds have similar investment profiles but overnight funds invest in securities with just 1 day maturity. This results in marginally lower returns but higher liquidity compared to liquid funds.

Both categories have strong credit profiles and offer easy liquidity. Overnight funds are best suited for parking surplus cash for a few days or building an emergency corpus. Liquid funds can work for slightly longer periods of 1-3 months. Choose a fund as per your specific need.

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