Picture this: You have just received a generous bonus, and the joy of having extra cash fills you with excitement. Yet, this extra cash brings with it a dilemma as you are looking for the best way to park your funds safely for the short term and give them room to grow. You also want relatively higher returns than a savings account but less risk than other mutual funds. Here, overnight funds and liquid funds may fit your needs.
These two debt mutual funds can provide an ideal blend of safety, liquidity, and reasonable returns, especially for short-term investment needs. Keep reading to explore the specifics of overnight funds and liquid funds in India, and find out which one or if both align better with your financial goals.
Understanding liquid funds
Liquid funds serve as short-term investment vehicles that primarily invest in money market instruments and debt securities. These instruments, including Commercial Paper, Treasury Bills, and Certificates of Deposit, usually mature within 91 days.
- Focus on safety
In liquid funds, the fund manager prioritises capital protection. Investments are typically made in instruments that possess high credit ratings, minimising the likelihood of default. While the funds aim for reasonable returns, the emphasis lies on the security of the investment.
Essential components of a well-managed liquid fund include controlling expenses through a low expense ratio and zero from the 7th day, maintaining a portfolio with good overall credit quality, and adhering to a disciplined investment approach.
- Ideal candidates for liquid funds
Liquid funds are suitable for individuals looking for a temporary avenue for their capital usually three months. These funds are often recommended by wealth managers when individuals receive a sudden inflow of money, such as from a substantial bonus or sale of property.
Parking money in liquid funds provides not just safety but also flexibility to move into equities when the time seems right. Equity investors can use liquid funds to stagger their investments into equity mutual funds through the Systematic Transfer Plan (STP). This facility allows you to transfer a predetermined amount from one mutual fund scheme to another at set intervals.
Understanding overnight funds
Overnight funds are open-ended debt schemes that focus on one-day maturing debt securities. Each day, the fund manager sells matured securities and uses the proceeds to purchase new ones that will mature the following day. Due to this daily maturation, an overnight fund carries minimal interest rates and default risks, making them low-risk investment vehicles.
- Ideal users of overnight funds
Business owners, entrepreneurs or individuals who frequently face situations where they have substantial amounts of money that they only need to hold for a very short time may find overnight funds beneficial. These investment options are more productive than leaving large sums idle or a current bank account, where the money earns no interest. Although the returns in overnight funds are not high, they are better than earning nothing.
- Use in emergency funding
For building an emergency fund, overnight funds serve as a viable option. Your investment has the potential for modest growth and remains highly accessible. Given their low-risk profile and daily maturity of assets, these funds provide both safety and liquidity. Thus, you can rely on them for quick access to cash in times of need while also experiencing some level of growth.
Overnight funds vs liquid funds? What should you pick?
Overnight funds and liquid funds in India serve as excellent options for short-term investment needs. Both offer low-risk avenues with varying degrees of liquidity and return rates. So, you don’t have to limit yourself to just one type. Combining both in your portfolio can enhance diversification, mitigate risk, boost potential returns, and contribute to overall growth. Choose wisely to meet your financial objectives.