In May 2023, the debt mutual fund industry in India witnessed a net inflow of ₹45,959 crore; indicating an inclination among Indian investors to explore and benefit from debt mutual fund categories. The Securities and Exchange Board of India (SEBI) has categorised debt funds into sixteen distinct categories each adhering to a specific need of the investor.
Two popular sub-categories of debt funds are liquid funds and overnight funds since both help investors grow their wealth steadily. Understanding how these funds differ from other debt fund categories can help investors make more informed decisions about which mutual fund investment they must choose.
Key differences between liquid/overnight funds and other debt fund categories:
- Liquid and overnight funds have a shorter investment horizon
Liquid funds are debt mutual funds that invest in fixed-income instruments like government bonds and treasury bills that have a maturity period of up to 91 days. Overnight mutual funds, on the other hand, invest capital in overnight securities and have a maturity period of one day. Other debt fund categories can have longer investment horizons, ranging from a few months to several years. Hence, liquid and overnight funds are good options for micro-term financial goals or to simply park idle funds and earn some returns on them.
- Liquid and overnight funds offer higher liquidity
The primary objective of a liquid mutual fund is to offer liquidity to the investor. Redeeming one’s mutual fund units is extremely convenient for a liquid fund investor. Overnight funds, too, are highly liquid, and they help investors access their funds efficiently. Other categories of debt mutual funds may not offer such high levels of liquidity.
- Liquid and overnight funds carry very low risk
Since liquid and overnight funds invest in short-term securities, they are not adversely affected by changing interest rates and market volatility. Therefore, as compared to other debt mutual fund categories, they pose a lower risk to the investor.
- Debt fund investments can yield higher returns as compared to liquid and overnight fund investments
Liquid and overnight funds generally yield lower returns as compared to other debt fund categories. Investors use these debt fund categories to park their savings for the short term. However, investors can earn moderate-to-high returns by investing in other debt fund schemes with longer investment horizons.
Ending note
Liquid funds and overnight funds can help investors make short-term investments to better utilise their idle funds since these funds are also low-risk and are not affected by market volatility. Investors must assess their risk-taking capacity and investment horizon before investing in any debt fund category, especially in liquid funds and overnight funds. Using a mutual fund calculator can help investors plan their mutual fund investments better. This online tool can help chalk out how an investor should undertake their investments and asset allocation to meet their various financial goals in the desired timelines.
