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Do you also keep a large sum of money in savings account so that it can be withdrawn immediately in case of need. If you do, then you are making a big mistake. By investing surplus, i.e., extra money, in liquid or overnight funds, you can earn more.

Liquid and overnight mutual funds fall under the category of debt funds. However, experts advise investing in both types of funds to meet short-term goals and needs. Liquid and overnight funds are different in terms of risk and maturity.

In this case, it is very important to understand which type of investors should invest in liquid and overnight funds and how do these funds work?

As the name suggests, liquid funds are short-term funds that invest in money market instruments and debt securities. There is liquidity in this scheme, meaning you can withdraw your investment whenever you need it.

Liquid funds are short-term instruments with a maturity of up to 91 days that invest in treasury bills, commercial paper, and certificates of deposit. They have the ability to provide better returns compared to a bank savings account with the security of investment. Liquid funds are usually redeemed within a day. While overnight mutual funds invest in debt securities which mature the next day of investment which is why these mutual funds are called overnight funds.

Talking about the risk in this investment, liquid mutual funds are more affected by higher interest rates. Compared to overnight funds, liquid funds have more credit and default risk because the fund manager sells overnight funds the next day, the default risk is significantly reduced.

In any investment, returns are the most important aspect. Liquid funds generally provide better returns compared to overnight funds. According to the Value Research data as of March 7, liquid mutual funds have given an average annual return of 7.05% over the past year, 5.18% over 3 years, and 5.02% over 5 years. In this period, the annual average return of overnight mutual funds has been 6.69%, 4.99%, and 4.65%.

Talking about taxes in this investment, both liquid and overnight funds fall under the category of debt funds. Income earned from investing in debt funds since April 1, 2023, is included in the investor’s annual income, on which tax is paid based on the slab. Regardless of how long the investment period is.

Now the question is, should you invest? Those who want to invest for a short period of one to three months can choose liquid funds. When you suddenly receive a large bonus or surplus money and you are unsure where to invest it, wealth advisors recommend investing in liquid funds. If the investment period is less than a week, then overnight funds are a better option because there is no exit load on redemption.

Jay Shah, Founder and CEO of Finwisor, says that investors who want to invest for up to 7 days should invest in overnight funds. If the investment perspective is more than a week and up to two months, then investing in liquid funds is a better option. There is no exit load in overnight funds, while there is an exit load of 7 days in liquid funds.

Most people prefer to keep their surplus cash in a bank savings account as they believe it is the safest option and they can withdraw money from their bank account at any time. However, liquid funds and overnight mutual funds also offer attractive options and along with better returns, your money invested in it remains mostly safe. The special thing is that in overnight funds, you can invest your money without any exit load.