Stock Market · Mutual funds, deeper

Overnight & liquid funds

Overnight and liquid funds are the safest, most liquid mutual fund categories. Designed for parking short-term cash. They consistently beat bank savings accounts and even short FDs for cash you'll need soon.

Overnight funds

• Invest only in 1-day instruments (overnight repos, CBLO)
• Near-zero interest rate risk
• Returns track current overnight rates (typically 5-7%)
• Withdrawal: T+1 settlement (you get money next business day)
• Best for: very short-term parking (1-7 days)

Liquid funds

• Invest in instruments maturing within 91 days
• Very low risk, slightly higher than overnight
• Returns: 6-8% annualised typically
• Withdrawal: T+1 settlement
• Some offer 'Instant Redemption' up to ₹50,000 (T+0 for small amounts)

vs Savings Account

Savings account interest: 2.5-3.5% (large banks).

Liquid fund return: 6-8%.

On ₹5 lakh parked for 6 months:

Savings account: ~₹7,500 interest.

Liquid fund: ~₹15,000-20,000.

Difference: ₹7,500-12,500, for the same access.

> A liquid fund is functionally a higher-yielding savings account for any cash you don't need within 24 hours.

vs Short FDs

Short FDs (90-day): 5.5-6.5% with bank.

Liquid fund: 6-8% with daily liquidity.

FDs lock your money. Liquid funds don't. For most cash management needs, liquid funds win.

Risks (small but real)

• Liquid funds have rarely seen negative days (Franklin Templeton crisis April 2020, credit-heavy schemes)
• Pick large, established fund houses (HDFC, ICICI, SBI, Aditya Birla) to minimise credit risk
• Check the credit quality of what the fund holds. A liquid fund reaching for extra yield through weaker credit is taking a risk the category label doesn't advertise

Tax treatment

Post-2023: liquid fund gains taxed at slab rate. For 30% tax bracket investors, net return becomes ~5%, similar to savings accounts after tax. Still slightly better, with more flexibility.

For investors in lower brackets, liquid funds remain meaningfully better than savings accounts.

Takeaway. Liquid funds beat savings accounts (6-8% vs 2.5-3.5%) with similar liquidity. T+1 withdrawal; some offer instant redemption up to ₹50,000. Post-2023, gains taxed at slab rate. Still better than savings for lower tax brackets.