The biggest selling point of mutual funds is that they offer a variety of options that fulfil almost every investor's need. But this variety sometimes leads to confusion. Take for example, overnight funds, liquid funds and ultra-short duration funds. All three are low risk, low return investment options meant for short-term investment.
However, there are subtle differences between the three, making them suitable for different circumstances. In this article, we will explore each fund to establish a clear difference between the three.
Overnight funds
Overnight funds invest in debt securities maturing the next day like overnight reverse repo and collateralized bonding and lending obligation (CBLO). They are the safest funds in the whole mutual fund universe. The returns are comparable to that offered by savings accounts. Instant withdrawal facility was recently extended to the fund category.
Liquid funds
Liquid funds invest in debt instruments like certificates of deposits, treasury bills and commercial paper that have maturity of fewer than 91 days. The risks are negligible and returns are similar to that offered by savings accounts. Liquid funds come with instant withdrawal facility, which means investors can withdraw up to Rs 50,000 from liquid funds instantly as opposed to 1-2 days in case of other fund categories.
Ultra-short duration funds
These funds invests in securities like treasury bills, commercial papers and certificate of deposits that have a maturity period between 3-6 months. They provide reasonable returns with sufficient liquidity. The returns are higher than that of overnight and liquid funds but it comes at a slightly higher risks.
|
Parameter |
Overnight funds |
Liquid funds |
Ultra-short term funds |
|
Maturity of underlying assets |
One day |
Less than or equal to 91 days |
Less than or equal to six months |
|
Liquidity |
High |
High |
Lower as compared to overnight and liquid funds |
|
Return* |
Comparable to savings account return (Around 3% in one year) |
Comparable to savings account return (Around 3% in one year) |
Higher than overnight and liquid funds (Around 4% in one year) |
|
Risk |
Almost no capital and interest rate risk |
Slight capital and interest rate risk |
Low but higher risks than overnight and liquid funds |
|
Exit load |
None |
Applicable in first 7 days |
Applicable on most schemes |
|
Taxation |
As per investor’s slab rates |
As per investor’s slab rates |
As per investor’s slab rates |
*Returns as of 15th November 2021 | Source: Value Research
When to recommend which fund?
MFDs say choice between the three depends on the time horizon and liquidity requirement of clients. Overnight funds are for those investors who want to take no risk at all. Liquid funds make sense for short-term parking (1-3 months) of cash. It is also the most suitable option for parking lumpsum money for investment through systematic transfer plan (STP), say MFDs.
“If someone has a time horizon of 1-3 months, he can venture into liquid funds but again one needs to keep in mind that liquid funds can invest in low credit. There is no rule saying liquid funds cannot venture into low credit. Investors should select the fund carefully,” said Rushabh Desai, founder of Rupee With Rushabh Investment Services.
Ultra short-term funds suit clients who have an investment horizon of 3-6 months and are open to taking slight risk. However, the present interest-rate scenario does not favours investment in this category.
“As of now investors should stick to very short duration funds because we are stepping into interest rate hike scenario. Funds like ultra-short duration might face mark-to-market affect,” said Shifali Satsangee, Founder, Funds Vedaa.
Disclaimer: An Investor Education Initiative by Mirae Asset Mutual Fund
For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint, refer to the knowledge center section available on the website of Mirae Asset Mutual Fund
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
