Overnight Funds Vs Liquid Funds

Overnight and liquid funds are a category of debt mutual funds. Overnight funds mature in a single day, while liquid funds mature within 91 days.
Overnight Funds vs Liquid Funds
3 min

Overnight funds and liquid funds fall under the category of debt mutual funds.

Overnight funds typically allocate their portfolio into securities with a maturity period of just one day, while liquid funds focus on investing in debt and money market instruments that mature within 91 days.

While both have a short-term time horizon, they differ significantly in terms of returns, risk and liquidity. This article will give you a detailed description of overnight funds, liquid funds, and the difference between liquid vs overnight funds.

What are overnight funds?

As the name suggests, overnight funds are open-ended debt funds that mature overnight. These funds work by gathering cash at the opening bell. Then, the fund gets deposited in overnight debt securities, and the capital is recovered the next morning.

Overnight funds do not carry any interest or credit-based risks due to the short time frame. Overnight funds consist of debt securities like bank deposits, overnight reverse repo

collateralised borrowing and lending obligation (CBLO), bill discounting, etc.

Also, as regulated by SEBI, it is mandatory for overnight funds to only invest in debt funds that have low risk. Read more about, What are overnight funds.

What are liquid funds?

Liquid funds are short-term open-ended debt mutual funds that invest in financial instruments that mature in 91 days. Their main aim is to ensure easy access to funds while providing a reasonable return on investment. They are especially used for parking surplus funds in the short term.

While liquid funds have become popular due to their short-term portfolio maturity, they have a higher chance of interest or credit-based risks when compared to overnight funds.

Liquid funds typically invest in instruments like corporate bonds, treasury bills, certificates of deposits, Government securities, and commercial papers. Read more about, What are liquid mutual funds.

Overnight funds Vs Liquid funds - A table comparison

Let’s understand the difference between liquid vs overnight fund:

Criteria Overnight funds Liquid funds
Investment horizon Is very short-term, typically one day Is short-term, up to 91 days
Risk Are extremely low-risk Are low risk
Returns Have relatively lower returns compared to liquid funds Have slightly higher returns compared to overnight funds
Liquidity Provide high liquidity Provide high liquidity
Volatility Have minimal volatility Have more volatility than overnight funds


Difference between overnight funds and liquid funds

Now that you are aware of the basic differences, let’s understand how overnight funds and liquid funds differ on other factors:

  1. Net Asset Value fluctuations: Overnight funds undergo minimal–almost negligible fluctuations , while liquid funds undergo minimal but slightly more volatile fluctuations than overnight funds.
  2. Suitability: Investors looking for short-term parking of funds with minimal risk opt for overnight funds, such as corporate treasuries and individuals with surplus funds for a short duration.
    Investors looking for short-term parking of funds with slightly better returns than overnight funds go for liquid funds.
  3. Interest rate sensitivity: Overnight funds are insensitive to interest rate changes, while liquid funds have low sensitivity to interest rate changes.
  4. Exit load: Overnight funds have no exit load, while liquid funds may attract exit load if redeemed within 7 days.
  5. Redemption time: Overnight funds typically offer same-day redemption. On the other hand, liquid funds usually provide redemption on the same day or the next business day.
  6. Taxation: Both these funds are taxed as per the investor's income tax slab for short-term capital gains.

Which is better - Overnight funds vs. Liquid funds?

Here is a more detailed explanation of the differences between liquid vs. overnight funds.

  1. Investment term: Overnight funds are ideal for investors with a very short-term horizon as they mature in one business day, while liquid funds have investment horizons ranging from a few days to 91 days, giving the investor more flexibility in terms of time frame.
  2. Risk appetite: An important factor to consider, whether you are going for a liquid or overnight fund, is how much risk you are willing to take. While both these debt securities have a low-risk profile, overnight funds are the least risky. Both principal and interest are recovered in a day because they invest in highly stable instruments. Liquid funds, on the other hand, can face fluctuations depending on the markets. However, they are also safer in comparison to other mutual funds.
  3. Reward: Liquid funds offer more diversification since they invest across a broad range of debt instruments—some of which can have a higher risk profile, which also ensures higher returns. The investment approach in overnight funds focuses on low risk and safety, so the returns are also limited. However, they are a more stable option.
  4. Ease of withdrawal: Overnight funds provide same-day withdrawal, assuring high liquidity and immediate access in the short term. Liquid funds may offer same-day or next-day redemption with a minimal exit load if withdrawn within 7 days of purchase. After this period, mutual fund withdrawals are free.

Which one should you select - Overnight funds vs. Liquid funds?

Deciding which funds are better for you between overnight funds vs liquid funds depends on three main factors:

  • Investment objectives
  • Immediate liquidity requirements
  • Risk tolerance capacity

Overnight funds may be more suitable for investors who want minimal risk and a short-duration investment. For investors who want slightly higher returns with a longer maturity, liquidity funds are more suitable.


In conclusion, investing in either overnight or liquid funds depends on your financial goals and ambitions. Both of these categories provide a significant level of liquidity and safety, rendering them appropriate for short-term investments and as a means to park emergency funds.

If you want to start investing in these mutual funds, the Bajaj Finserv Mutual Fund Platform can help you find the right options tailored to your investment needs. You can browse through over 1,000 mutual fund schemes and also compare mutual funds to find the one that aligns with your risk tolerance. You can then make a lump sum investment amount in that fund or even start a SIP investment to fulfill your financial goals.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

Are overnight funds taxable?
Yes, overnight funds are taxable. They are subject to taxation based on short-term capital gains tax rates for investments held for less than three years.
Are overnight funds risky?
Overnight funds are generally considered low-risk investments due to their focus on highly liquid and short-term securities.
Who should invest in overnight funds?
Overnight funds are suitable for investors seeking low-risk options with high liquidity for short-term parking of funds or as an alternative to savings accounts.
Is liquid fund tax free?
No, liquid funds are not tax-free. They are subject to taxation based on short-term capital gains tax rates for investments held for less than three years.
How do I choose overnight funds?
Although Overnight Funds are generally considered low-risk, it's important to note that there may be differences in risk levels among individual funds. Analyze the market carefully and select funds with a reliable history of strong performance and competitive costs to maximize potential returns.
How do overnight funds work?
Overnight funds invest in securities with a maturity of one day, providing a safe and highly liquid investment option for investors. They aim to generate returns by capitalizing on short-term interest rate movements while maintaining minimal risk.
Can I withdraw money from liquid funds anytime?
Yes, you can withdraw money from liquid funds at any time, making them highly liquid investment options suitable for short-term needs.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.