There are so many mutual funds schemes out that sometimes one wonders whether it is a boon or a curse. Those who have a deep understanding about different funds, they can distinguish between multiple schemes, compare them with their peers and make an informed investment decision. On the flip side, young earners who are new to mutual funds and investing in general may or may not be able to distinguish between two schemes whose investment objective may sound similar but differ in risk profile and asset allocation. This is the primary reason why financial advisors recommend investors to determine their risk appetite while financial planning.
Market regulator SEBI, (Securities and Exchange Board of India, defines mutual funds them as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time.”
Overnight funds are those mutual funds that invest in fixed income securities that come with a maturity period of just one day. It is because of this that the fund manager has to buy new securities every day. These funds are usually considered by investors for parking building an emergency fund or a fund for medical expenses. An overnight fund is an open ended scheme which invests in overnight securities. Another good thing about overnight funds is that they offer your investment portfolio some liquidity.
Liquid funds are those debt funds which predominantly invest in debt and debt-related instruments. Liquid funds are open-ended debt mutual funds that invest in debt and fixed income securities that come with a maturity period of up to 91 days. The fund manager makes sure that he/she invests in securities that come with a maturity period of up to 3 months or 91 days. That’s because the primary objective of a liquid fund is to protect the investor’s finances and offer them capital appreciation. A fund manager only chooses highly rated debt securities and invests in quantum with the scheme’s investment
Overnight Funds Vs Liquid Funds: What is better?
Although both are debt funds, the investment strategy of both overnight and liquid funds is different. A liquid fund invests in securities which mature over 91days whereas overnight funds invest in overnight securities. Before deciding which fund to invest in, investors should bear in mind the primary purpose of investing in mutual funds. Whether it is long term goals, or are you building an emergency fund. Or do you have surplus capital that you want to park for a few days before utilizing it. Both funds serve different investment purposes and depending on your income needs you should consider investing in either of the fund’s. If you do not have a deep understanding about debt funds or how they function then you need to consult a financial advisor. Also decide whether you want to make a lump sum investment or start a SIP. Systematic Investment Plan allows investors to invest small amounts at regular intervals. One can even use a SIP calculator to determine a rough estimate of their capital gains at the end of their SIP Investment.