Overnight Funds vs Liquid Funds - what's the difference | North Loop Official Blog
North Loop Logo
North Loop
29 Oct 2020

Overnight Funds vs Liquid Funds - what's the difference

thumbnail for Overnight Funds vs Liquid Funds - what's the difference
Credit: North Loop

An investor looking to park their surplus funds over a short period of time may often be spoilt for choice. Assuming that investors seek low-risk short tenure instruments, there are two options- Overnight Funds and Liquid Funds.
While Liquid funds were predominantly preferred by investors to park their surplus funds, the reclassification of mutual fund categories by SEBI has brought about a popular scheme known as overnight funds. The shift in investment trends can mainly be attributed to the introduction of an exit load on premature withdrawals pertaining to liquid funds.

What are Liquid Funds?

Liquid funds are a type of debt funds under which investments have a holding period ranging between one week and one month. Investments are made in securities such as certificates of deposits, commercial papers, treasury bills, and other securities that mature in up to 91 days. But some liquid funds were found to have invested in securities that lent money to companies that eventually failed to repay, which resulted in a significant decline in the net asset value of the fund. Factors such as interest rate risks and credit risks make investments in this fund of a relatively riskier nature. In addition to this, the recent introduction of exit loads on premature withdrawals by SEBI ensures investors park their money in the scheme for a minimum of 7 days in order to avoid exit load.

Start investing for free with North Loop and get personalized recommendations

What are Overnight Funds?

Overnight Funds were introduced in 2018 by SEBI after bringing about a recategorization of mutual funds schemes to make the lives of investors easier.
Overnight fund is a type of debt fund under which investments have a holding period of up to one week. Under this fund, investments are made in securities that lend money to credit-worthy institutions such as banks, insurance companies, mutual funds, provident funds, and NBFCs (basically securities that mature in one day).
In contrast to liquid funds, overnight funds do not carry an exit load on premature withdrawals and the risk exposure is very less as the securities carry a maturity period of 1 day.

How to choose between the two?

Theoretically, liquid funds are designed to serve the same purpose as that of a savings account- keeping money safe and maximizing liquidity. Liquid Funds should be treated as more of a savings oriented fund rather than a returns oriented fund. Liquid funds are better suited for investors looking to keep their money parked in for more than 7 days.

Overnight funds are best suited for investors who want to hedge risks to a maximum extent and park their money for up to one week. Overnight funds also offer more transparency and the highest liquidity as the funds do not levy an exit load. But from a returns perspective, liquid funds steal the show as investments are made into a relatively riskier set of securities.

How to invest in Liquid/Overnight Funds?

North Loop offers carefully handpicked mutual funds offering round-up investing and an automated set of rules and goals. Click here to sign up with North Loop.

Save money with

No-fee banking, investments, remittances & insurance for the global Indian

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.