ઓવરનાઇટ ફંડ્સ વર્સેસ લિક્વિડ ફંડ્સ

When investors seek safe avenues to park their surplus cash for a short period, overnight funds and liquid funds are often the most preferred options. Liquid and overnight funds can offer investors higher returns than conventional savings accounts, but they also carry significantly different levels of risk.

Both overnight funds and liquid funds fall under the category of debt mutual funds. The way the funds are managed depends on when the money needs to be invested. An understanding of this distinction between overnight funds vs liquid funds will help investors efficiently manage their cash needs, as well as provide a low-risk means of parking funds temporarily. Next, let's take a closer look at each option, starting with overnight funds.

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ઓવરનાઇટ ફંડ્સ શું છે?

Overnight funds are mutual funds that invest in various securities that mature within one business day. The main objective of overnight funds is capital preservation with a small return. Most overnight funds are closely related to the short-term rates of investment that exist in today's financial markets. These short-term rates include the overnight fed funds rate, which is the actual interest rate charged to each financial institution daily. These overnight funds are sometimes referred to as an overnight address in money markets, as they reflect the very short-term nature of their lending and purchasing activities.

Key features of overnight funds are as follows:

• An overnight fund invests its assets in overnight reverse repurchase agreements with the Federal Reserve, treasury-backed, and other safe money market investments
• Minimal risk because of a low credit and interest rate risk. This is their biggest selling point. As the "loan" is only for 24 hours, there is almost no time for interest rates to change or for the borrower to go bust.
• The money is rolled over each day. Moreover, overnight funds can be used to meet emergency cash needs or for very short-term parking of cash.

ઉદાહરણ:

Suppose you have Rs 1,00,000 and plan to use it in two days. You place it in an overnight fund giving interest of 6.5%.

Interest earned = Investment Amount × Annual Rate × Number of Days365

Rs 1,00,000 × 6.5% × 2365 = Rs 36

​Thus, you will end up getting a return of approximately Rs 36.

લિક્વિડ ફંડ્સ શું છે?

Liquid funds invest primarily in short-maturity money market assets, which can generate slightly better returns than overnight funds. They have additional exposure to interest rate fluctuations than overnight funds. Liquid Funds generate returns by investing in short-term debt instruments until they mature. Liquid Funds are mainly impacted by domestic factors. However, Global Interest Rate Trends are also important. The Federal Reserve's (Fed) Funds Rate is an example of an international benchmark that will impact Liquidity Conditions and, therefore, the rate of Interest.

Liquid Funds tend to remain much more stable than Long-Term Debt Funds and are considered a reliable, short-term investment option.

Likely investments found in liquid funds would include:

• Treasury bills with shorter terms
• Certificates of deposit and U.S. treasuries with longer-term maturities
• Very short-term government bonds rated AAA or better.

ઉદાહરણ:

If you are going to buy a smartphone in one month and you have Rs 1,00,000 to invest, you can place it in liquid funds.

Return = Principal × Rate × Days365

Rs 1,00,000 × 6.5% × 30365= Rs 534

Thus, you will end up with an interest of Rs 534.

Overnight Funds vs Liquid Funds: Key Differences

This table presents a parameter-wise overview of overnight funds vs liquid funds returns comparison, including investment duration, risk, withdrawal rules, interest rate sensitivity, and returns.

ઉદાહરણ તરીકે:

You have Rs 50,000 saved for a vacation that's 2 months away:

• An overnight fund would earn approximately Rs 400-Rs 650 during this time period.
• A liquid fund would earn approximately Rs 660-Rs 1,000 during this time period.

This difference in earnings is minimal but will build up when investing larger amounts or making repeated investments over time.

Which Is Better: Liquid vs Overnight Funds?

The fund you choose depends on your investment time frame, your liquidity needs, and your expected returns from that investment. You can also explore different types of overnight funds vs liquid funds.

ઓવરનાઇટ ફંડ્સ

Overnight funds are perfect for situations when funds are needed at the shortest possible notice. These are ideal for risk-averse investors who want immediate access to funds. Most of these are TREPS-dominant or Repo-based funds, which prioritise collateralised lending for maximum security. They can be used as both emergency funds or a very short-term way to put money temporarily. Overnight funds are suitable for investors who want to protect their capital.

લિક્વિડ ફંડ્સ

Liquid Funds are better suited for longer-term (a few months) parking of funds. They are slightly more attractive in terms of interest rates. You can choose Standard Liquid Funds for a mix of corporate debt or Sovereign-heavy Liquid Funds for government-backed safety. Many also offer Instant Access features. They are ideal for scheduled and known short-term expenses like holidays and bills.

Can Overnight and Liquid Funds Be Used Together?

Many investors can combine Overnight and Liquid Funds in their overall cash management strategy.

• Emergency Fund Strategy: Invest part of your emergency savings in available overnight accounts. Use some liquid accounts to invest the rest of your emergency savings.
• Short-Term Reserve Strategy: Store your short-term reserves in overnight accounts until the transaction occurs within 2–3 days. Store your intermediate term and long-term needs in liquid accounts and use STPs as appropriate based on the amount of time until the purchase.
• Cash Flow Strategy: Invest in liquid accounts using net cash received from work, as well as net cash from other receipts, while keeping some overnight funds and available cash for unanticipated costs.

How Do Taxation and Costs Differ in Liquid vs Overnight Funds?

Overnight and Liquid Funds are considered debt mutual funds. The taxable gains for both types of investments will depend on how long the investment is held before selling.

• If an investor sells an overnight fund after 3+ years, that investor will be taxed at 20% of their original investment.
• Investors who sold their overnight fund after 3 years will have their income tax bracket determine their taxable gain.
• Expense ratios are often lower for overnight funds vs liquid funds.
• Overnight funds have lower expense ratios due to a lack of trading activity in their portfolios.
• Liquid funds generally have higher expense ratios, although this difference is relatively small.
• Over time, expense ratios will significantly affect the overall returns to an investor.

Make the Right Choice for Short-Term Investments!

Utilising overnight funds and liquid funds are very effective methods to invest money that is only needed for a brief period of time. Overnight funds are the safest option, investing in 24-hour securities. They are perfect for the money you need within a week, as they offer instant access with zero exit fees. Liquid funds are better for goals seven days to three months away, offering slightly higher returns. Just remember that withdrawing from a liquid fund within the first six days usually triggers a small penalty fee. For the best results, keep emergency cash in overnight funds and planned savings in liquid funds to balance total safety with better growth!