How overnight funds differ from liquid funds

New Delhi: Of late attractiveness of liquid funds have come down after the market regulator Sebi introduced graded exit load on liquid funds. Investors who earlier used to park their short term money in liquid funds have now switched to overnight funds to avoid exit load. Worth mentioning here is that with effect from October 21, 2019, you have to pay an exit load of up to 0.007% if you exit before seven days of investment. Earlier, there was no exit load in liquid funds. Further, with effect from April 1, 2020, liquid funds are required to hold at least 20% of their net assets in liquid assets such as cash, government securities, T-bills and repo on government securities. Let us understand how overnight funds differ from liquid funds.

Overnight Funds

This fund mainly invests in securities having maturity of one day. Here fund managers have to buy securities on a daily basis. Due to its ultra-short maturity period, these schemes are not affected by interest rate changes and defaults in securities. These funds are considered as the safest among all the debt schemes due to zero default and interest rate risk. As these funds bear the lowest risk, returns offered by such schemes are also lower.

Mainly, corporates park their liquid cash in overnight funds to earn risk-free return.

Liquid Funds

Liquid fund is a type of debt fund that invests in debt and money market securities with up to 91 days maturity. Sometimes to generate higher return, fund managers invest in low-rated bonds and securities and this could be a potential risk for investors. Worth mentioning here is that in the recent past many liquid funds have written down their value of investment due to credit rating downgrade of underlying securities. Returns from these funds are higher than overnight funds.

Where to invest

If your investment horizon is more than 7 days and less than 91 days, then you may consider investing in liquid funds. In case you want to part your idle cash for less than seven days, then overnight funds are suitable for you.