What are the main differences between liquid funds, overnight funds, and money market funds?

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The landscape of mutual funds in India has seen significant changes in recent years, driven by regulatory developments and evolving investor preferences. One such shift was the introduction of categories like liquid funds, overnight funds, and money market funds. 

These debt mutual funds have become popular for those seeking to park their funds temporarily or invest in short-term instruments.

Liquid funds: Your gateway to short-term liquidity

Liquid mutual funds are a type of debt fund that invests in short-term securities. They primarily invest in low-risk, highly liquid securities such as treasury bills, certificates of deposit, commercial papers, and other short-term debt securities. These funds typically mature in a few days to a few months, with a maximum maturity of 91 days.

Overnight funds: The swift solution

Overnight funds are a specific category of debt mutual funds that specialise in very short-term instruments with an extremely short maturity period. As the name suggests, these funds invest in instruments that mature overnight or within one business day. 

Common investments for overnight funds include Tri-party repo (TREPS), Government securities, Treasury Bills, and other overnight money market instruments. Overnight funds are an ideal choice for investors who require immediate liquidity without compromising on the safety of their investments.

Money market funds: A balance between liquidity and returns

Money market funds invest in short-term, highly liquid securities. They focus on a wide variety of low-risk, high-quality short-term debt securities, such as government bond mutual funds, commercial paper, and certificates of deposit.

With an average maturity period of more than a year, these funds can balance liquidity and returns. Money market funds are preferred by investors seeking higher returns on their short-term cash holdings than traditional savings accounts while minimising risk.

Comparing the three – Liquid funds, overnight funds, and money market funds

Let’s break down the main differences between these three types of funds:

Maturity period:

Liquid funds: Maturity typically ranges from a few days to a few months, with a maximum of up to 91 days.

Overnight funds: Extremely short maturity period, with instruments maturing overnight.

Money market funds: Average maturity period of over one year.


Liquid funds: Highly liquid, allowing quick access to funds.

Overnight funds: Extremely liquid, providing immediate access to investments.

Money market funds: Slightly less liquid than liquid and overnight funds but still readily accessible.

Risk level:

Liquid funds: Low risk due to investments in short-term and highly liquid instruments.

Overnight funds: Low risk, as they invest in overnight money market instruments.

Money market funds: Low risk, slightly longer maturity period, but safe.


Liquid funds: Provide reasonable returns, suitable for short-term parking of cash.

Overnight funds: May offer slightly lower returns due to the ultra-short-term nature of investments.

Money market funds: Offer the potential for slightly higher returns due to the longer average maturity period.

Bottom line

Debt mutual funds, which include liquid funds, overnight funds, and money market funds, provide Indian investors with various options. You can use these tax-saving options by understanding the differences and aligning your decision with your financial goals. 

Remember to use a mutual fund investment calculator to determine the potential growth of your investments and consult with a financial advisor if you have any specific questions or concerns.

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