Overnight funds and liquid funds are both debt mutual funds built for parking cash for short periods, and they differ in how long the securities they hold take to mature. An overnight fund holds securities that mature in one business day, while a liquid fund holds securities that mature in up to 91 days.
The choice between overnight funds and liquid funds comes down to how long the money will sit and how much extra return is worth a little more risk. Overnight funds suit a few days up to a week with no exit charge, and liquid funds suit a week to a few months with a slightly higher return, though both stay close to the return of a savings account and neither is risk-free.
Overnight funds vs liquid funds at a glance
| Feature | Overnight fund | Liquid fund |
|---|---|---|
| Maturity of the securities | One business day | Up to 91 days |
| What it holds | Overnight instruments such as repo and tri-party repo (TREPS) lending | Treasury bills, commercial paper, certificates of deposit and other money market instruments |
| Interest rate risk | Negligible, since the holdings mature the next day | Low, but slightly higher than an overnight fund |
| Credit risk | Negligible, since the lending is for one day and backed by collateral | Low, with some exposure to the issuers of the instruments |
| Typical riskometer | Low | Low to Moderate |
| Return potential | Lower, and close to the overnight lending rate | Slightly higher |
| Exit load | None | Graded for the first six days, and none from the seventh day |
| Redemption | Same day or next business day | Next business day, and some fund houses offer instant redemption up to a limit |
| Tax | Gains taxed at the slab rate for units bought on or after 1 April 2023 | Gains taxed at the slab rate for units bought on or after 1 April 2023 |
The exit load on liquid funds
| Day of redemption | Exit load on the redemption amount |
|---|---|
| Day 1 | 0.0070% |
| Day 2 | 0.0065% |
| Day 3 | 0.0060% |
| Day 4 | 0.0055% |
| Day 5 | 0.0050% |
| Day 6 | 0.0045% |
| Day 7 onwards | Nil |
On a redemption of ₹10 lakh on the first day, the exit load is ₹70, so the charge is small and still avoidable. Some fund houses allow instant redemption from a liquid fund up to ₹50,000, or 90% of the holding if that is lower, and the facility is not available in every scheme.
Which one fits which need
| Situation | Better fit | Reason |
|---|---|---|
| Cash that may be needed within a few days | Overnight fund | There is no exit load at any time, and the risk is the lowest. |
| Cash parked for a week to a few months | Liquid fund | The extra return is earned after the exit load period ends. |
| Emergency money that is rarely touched | Liquid fund | A small return advantage builds up over time, and the instant redemption option helps in a pinch. |
| Sale proceeds waiting for the next investment | Either, depending on the wait | Overnight for a few days, and liquid for longer. |
| Source fund for a systematic transfer plan (STP) into equity | Liquid fund | It is the usual source scheme, with transfers that avoid exit load after day seven. |
The risks that remain
| Risk | Overnight fund | Liquid fund |
|---|---|---|
| Capital loss | Very unlikely, though returns are not guaranteed | Unlikely, though small markdowns have occurred in rare credit events |
| Return variation | Tracks the overnight rate, which can fall when liquidity is abundant | Can vary slightly with short-term interest rates |
| Deposit insurance | None | None |
| Comparison with a savings account | Returns are close to the overnight rate, and not far above savings account rates | Returns are slightly higher, with the extra return reflecting a little extra risk |
A bank savings account is insured up to ₹5 lakh per depositor per bank, and a mutual fund is not, so an overnight or liquid fund is not a replacement for a bank deposit when certainty is the priority.
What investors should take from this
Overnight funds are the lowest-risk choice for very short periods, and liquid funds are the usual choice for parking cash for weeks or months. The return gap between the two is small, so the holding period and the exit load matter more than the headline yield.
Kuvera offers direct mutual funds, including overnight and liquid funds, and the factsheet of each shows its riskometer, expense ratio and holdings.
Frequently Asked Questions
1. What is the difference between an overnight fund and a liquid fund?
An overnight fund holds securities that mature in one business day, and a liquid fund holds securities that mature in up to 91 days.
2. Which is safer, an overnight fund or a liquid fund?
An overnight fund has lower interest rate and credit risk because its holdings mature the next day. Both are low-risk and neither is risk-free.
3. Do liquid funds have an exit load?
Yes, a graded exit load for the first six days, from 0.0070% on day one to 0.0045% on day six, and none from the seventh day. Overnight funds have no exit load.
4. How are overnight and liquid fund gains taxed?
At the investor’s slab rate, for units bought on or after 1 April 2023.
5. Can an emergency fund be kept in a liquid fund?
Yes, many investors do, since liquid funds are easy to redeem. A part is usually kept in a bank account for immediate needs, since the mutual fund redemption takes a business day.
Mutual fund investments are subject to market risks. Read all scheme related documents carefully. Tax rules mentioned here reflect current rules and can change.
