The differences between overnight funds and liquid funds

Investing in mutual funds is a great way to create long-term financial security. It can provide steady returns and help build a secure future for you and your family. But for some investors, liquidity is just as important as long-term growth, and they prefer flexibility to liquidate their holdings more quickly than traditional mutual funds allow. For these investors, liquid funds and overnight funds are two popular options that provide increased liquidity and flexibility.

Overnight funds are those debt funds that primarily invest in securities with a maturity of 1 day. Liquid funds are also mutual fund schemes, but they invest in debt instruments that usually mature within 91 days, so the investor’s capital is not at risk for very long either.

With high liquidity and flexibility but slightly different risk, return, exit loads, and strategies, these two short-term investments present different opportunities to investors. Read on to discover all you need to know about the differences between overnight funds and liquid funds.

1. Securities these funds invest in

Overnight funds are invested in overnight reverse repos, collateralized borrowing and lending obligations (CBLOs) and various other debt and money market securities with one-day maturities. 

Liquid mutual funds invest in commercial papers, treasury bills, government securities, and other money market instruments having a slightly longer maturity period than overnight funds. Due to the low-risk nature of these securities, both these funds are considered as low-risk investment options.

2. Risk level

Overnight funds are restricted from investing in any “risky” debt instruments carrying interest rate, credit, and liquidity risks. This is done to virtually eliminate the risk of default in the bond portfolio. This makes overnight funds safer than liquid funds, which may invest in slightly riskier instruments with a longer maturity period. Although liquid funds expose investors to more risk due to their investment strategy, the risk is still minimal compared to most other debt funds types.

3. Exit load

Exit load is the charge imposed on investors if they withdraw their funds before a specified time. Other than its lowest risk, overnight funds have an advantage; they do not have exit loads.

For liquid funds, SEBI introduced graded exit loads for up to 6 days in October 2019. If you sell your liquid fund investment within six days of purchase, you will have to pay an exit load. That being said, there is no exit load from the seventh day onwards.

4. Returns

The returns from both these mutual fund investments come from the interest earned on debt instruments rather than capital appreciation. However, since liquid funds tend to invest in securities with a longer maturity period, they potentially generate higher returns compared to overnight funds.

5. Liquidity and instant access facility

Initially, instant access facility was available only for liquid funds, allowing investors to withdraw up to Rs. 50000 per day per fund. But recently, SEBI has allowed asset management companies to offer IAF in overnight funds also, meaning investors can get their money credited into their bank accounts within a few hours instead of waiting for normal redemption transactions.


Whether you decide to invest in liquid funds or overnight funds, it’s important to consider your personal financial goals, risk appetite, and time horizon. If you need immediate access to your money or prefer nil risk and volatility, an overnight fund may be ideal. However, if you are looking for comparatively higher returns while still having some liquidity protection, then a liquid fund may work for you.

Both investment options offer high liquidity and can be used to park your surplus funds or implement a systematic transfer plan to route investments into an equity fund. The key is to understand your investment priorities and make an informed decision accordingly.

Frederick Sullivan

Hannah Sullivan: As a seasoned journalist, Hannah's blog provides hard-hitting analysis and in-depth reporting on major crime stories. Her thorough coverage and fearless reporting make her a trusted voice in the field.