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Post the Franklin Templeton issue with six debt funds, many investors have been considering other options under the debt category such as liquid funds and overnight funds. In this article we will look at the difference between these three categories of mutual funds, to help you make an informed decision when it comes to choosing the right investments for your portfolio.
What is the difference between liquid funds, overnight funds and other debt funds?
We can understand the underlying difference between these three categories of funds by looking at the duration of securities they invest in.
- Overnight funds: As the name suggests, Overnight funds are schemes that invest in securities with a maturity of one day. They are open ended debt funds that primarily invest into money market instruments.
- Liquid funds: In a liquid fund, it is mandated that all securities of a portfolio are invested into papers with a maturity period of 91 days or less.
- Other debt funds: Other debt funds, which include ultra short term funds, short term funds, gilt funds, etc. invest in securities that have a tenure of more than 6 months They invest in fixed income instruments like government / corporate bonds, treasury bills, certificates of deposit and so on.
Comparison of liquid funds, overnight funds and other debt funds
| Overnight funds | Liquid Funds | Other Debt Funds | |
| Tenure | Overnight funds invest in securities that mature in 1 day. | Liquid funds are mandated to invest in securities with a maturity period of less than 91 days. | Other categories of debt funds generally have a maturity period of 6 months to 1 year or longer. |
| Risk | Across the three schemes, overnight funds are associated with the least volatility and risk. | Liquid funds are generally quite stable, but there have been instances of default in the past. | Depending on the type of debt funds and the securities that it invests in, the volatility and risk can vary, but are generally higher than overnight and liquid funds. |
| Exit Load | Overnight funds do not have any exit load associated with them, as their maturity period is just one day. | Liquid funds generally have an exit load up to a period of 7 days. Post this, some funds offer an instant redemption facility, where the amount is deposited in your account within 30 minutes. | Other categories of debt funds typically have higher exit loads in comparison to both liquid and overnight funds. Apart from this, proceeds may take up to two days to reach your account. |
| Returns | Overnight funds generally provide lower returns than both liquid funds and other debt funds. | Since the tenure for liquid funds is longer, their returns are higher than overnight funds. While the returns are usually stable, this comes with slightly higher risk.. | The returns in debt funds are closely associated with the interest rates within the country and tend to fluctuate. While there is a chance for higher returns than liquid funds, it could increase the risk level of any investor. |
Now that you know the difference between these three types of schemes, you can have a better idea of what suits your requirements as an investor. However, before making a final decision, ensure that you consult a financial advisor who can help you pick the right funds to match your risk tolerance and asset allocation strategy.
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October 4, 2018
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Post the Franklin Templeton issue with six debt funds, many investors have been considering other options under the debt category such as liquid funds and overnight funds. In this article we will look at the difference between these three categories of mutual funds, to help you make an informed decision when it comes to choosing the right investments for your portfolio.
What is the difference between liquid funds, overnight funds and other debt funds?
We can understand the underlying difference between these three categories of funds by looking at the duration of securities they invest in.
- Overnight funds: As the name suggests, Overnight funds are schemes that invest in securities with a maturity of one day. They are open ended debt funds that primarily invest into money market instruments.
- Liquid funds: In a liquid fund, it is mandated that all securities of a portfolio are invested into papers with a maturity period of 91 days or less.
- Other debt funds: Other debt funds, which include ultra short term funds, short term funds, gilt funds, etc. invest in securities that have a tenure of more than 6 months They invest in fixed income instruments like government / corporate bonds, treasury bills, certificates of deposit and so on.
Comparison of liquid funds, overnight funds and other debt funds
| Overnight funds | Liquid Funds | Other Debt Funds | |
| Tenure | Overnight funds invest in securities that mature in 1 day. | Liquid funds are mandated to invest in securities with a maturity period of less than 91 days. | Other categories of debt funds generally have a maturity period of 6 months to 1 year or longer. |
| Risk | Across the three schemes, overnight funds are associated with the least volatility and risk. | Liquid funds are generally quite stable, but there have been instances of default in the past. | Depending on the type of debt funds and the securities that it invests in, the volatility and risk can vary, but are generally higher than overnight and liquid funds. |
| Exit Load | Overnight funds do not have any exit load associated with them, as their maturity period is just one day. | Liquid funds generally have an exit load up to a period of 7 days. Post this, some funds offer an instant redemption facility, where the amount is deposited in your account within 30 minutes. | Other categories of debt funds typically have higher exit loads in comparison to both liquid and overnight funds. Apart from this, proceeds may take up to two days to reach your account. |
| Returns | Overnight funds generally provide lower returns than both liquid funds and other debt funds. | Since the tenure for liquid funds is longer, their returns are higher than overnight funds. While the returns are usually stable, this comes with slightly higher risk.. | The returns in debt funds are closely associated with the interest rates within the country and tend to fluctuate. While there is a chance for higher returns than liquid funds, it could increase the risk level of any investor. |
Now that you know the difference between these three types of schemes, you can have a better idea of what suits your requirements as an investor. However, before making a final decision, ensure that you consult a financial advisor who can help you pick the right funds to match your risk tolerance and asset allocation strategy.
Start your personal wealth journey with us today!
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