Got surplus money? Invest in overnight, liquid funds

Financial planners believe surplus money lying in bank accounts to meet near-term goals like paying school/college fees, vacations, or purchasing some discretionary goods can be invested in liquid or overnight funds to earn higher returns.

What are overnight, liquid funds?
Overnight funds have a portfolio that invest in securities that mature in a single day; while liquid funds invest in debt and money market securities that mature within 91 days. They buy short-term instruments like treasury bills and government securities.

Why wealth managers advise investors to put money in liquid or ultra short term funds?
If money lies in investors’ savings bank account in banks like SBI or HDFC Bank interest of 2.7-3% is earned. Despite a rise in interest rates across the board, banks have not hiked savings bank account rates. However, bond yields have increased the returns of debt mutual funds. Currently investors can earn 6% on their investments in overnight and liquid funds.


What is the time frame and minimum amount needed in these funds?
Financial planners suggest investors should use overnight funds to invest money if they have a time frame of one day to a week, while they can use liquid funds if they have a time frame of seven days to 3 months. Liquid funds levy a graded exit load of 0.0070% to 0.0045% if investors withdraw money before seven days. Most funds accept amounts as low as `500 here as a lump sum investment.

What returns can one expect?
As per data from Value Research, over the last one year, the liquid fund category has given an average return of 4.32%. However, due to a rise in yields, financial planners believe investors can expect a return of 6%.

How soon can I get money back if I am invested in such funds?
Once an investor submits a redemption request before the cut-off time on a working day, the money reaches the bank account on next working day.

What are the risks?
Financial planners consider liquid funds to carry lowest risk as well as least volatility among mutual funds. This is because they generally invest in instruments with high credit rating (P1+). The net asset value of these funds change to the extent of interest income accrued, including weekends.

How do liquid funds score on the tax front?
Like all other debt funds, liquid funds held for more than three years are eligible for long-term capital gains tax treatment with indexation. If you sell before three years, you have to pay tax as per your tax slab.