Cash and Overnight Funds

Liquid fund or cash fund invests primarily in money market instruments like treasury bills, certificate of deposits, commercial papers, treasury bills etc., that have a residual maturity of less than or equal to 91 days. Redemptions or withdrawals from liquid funds are processed within 24 hours on business days. Some liquid schemes also provide facility of instant redemptions, i.e. money is instantly credited to your savings bank account upon submission of redemption request. The objective of these schemes is to provide investors an opportunity to earn more returns than current or savings account with high degree of liquidity.

Overnight funds have virtually no interest rate risk because overnight securities mature overnight. So interest rate changes will have no impact on Net Asset Value (NAV) because the issuer will pay the interest and principal on the next business day. Liquid funds may experience some volatility but the volatility will be low because of the very short maturity profiles of these schemes. Longer the maturity of a scheme, higher is its interest rate sensitivity. Since liquid funds invest in debt or money market securities which mature within 91 days, its interest rate sensitivity is fairly low.

Overnight funds invest primarily in Collaterized Borrowing and Lending Obligations (CBLOs). These papers are fully backed by Government Securities. So there is no credit risk. However, investors should note that liquid funds may have credit risk, if the credit rating of papers in which a liquid fund invests gets downgraded, then as per SEBI rule, the scheme has to mark the value of the paper to market in its NAV calculation. Though SEBI has taken several measures to reduce the risk of liquid funds e.g. minimum allocation to G-Secs, issuer concentration, industry concentration norms, you must ensure that the credit quality of the underlying portfolio of your liquid fund is sufficiently high. You can check the credit quality of your liquid fund from the fund factsheet. You should also consult with a financial advisor if required.

Both overnight and liquid funds invest in highly liquid securities. Overnight funds do not levy any exit load on redemptions. In other words, you can redeem your investments in overnight funds at any time, without any charge or penalty. Investors should note that liquid funds charge exit load on redemptions made within 7 days of investments. You should take exit load into consideration when planning short term investments.

Redemption from these two categories of funds is credited in your bank account within T (Transaction) +1 working day.

Good financial planning practices require investors to have an emergency fund to meet any exigency. Emergency fund can help to face financial exigencies like an unexpected loss of employment, a medical emergency, urgent home repairs etc., without disturbing the investments made for your long term financial goals. Financial advisors usually recommend investors have an emergency fund which can meet 3 to 6 months of their monthly incomes. Since overnight and liquid funds have relatively low risks and high liquidity, they are suitable for your emergency fund planning. Money parked in your emergency funds need not be idle; if you park it in an overnight or liquid fund, you emergency fund will grow over time due to accrued returns and compounding.