A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
How are overnight funds different from liquid funds?
Overnight funds rank below liquid funds among debt funds in terms of time horizon and risk profile. Overnight funds invest in debt securities that mature the next day. Liquid funds invest in securities that mature within 91 days. Therefore, liquid funds are subject to higher interest rates, credits and default risks than overnight funds as the money returns to the overnight fund the next day when maturing securities are sold by the fund manager.
Night funds are preferable to park your excess money for less than a week as they do not have any exit load. Liquid funds have a graduated exit load of up to six days and no exit load from day 7. Liquid funds are free to invest in any money market instrument such as CDs and CPs that mature within 91 days, regardless of their credit quality. Therefore, they can carry a higher credit risk than overnight funds.
Because liquid funds have slightly more maneuver in managing credit risk due to the longer maturity of their portfolio than that of overnight funds, they tend to give a higher return than overnight funds. If ease of withdrawal is your priority for a need that may arise at any time, overnight funds should be chosen. If you’re looking for a comeback while parking your excess money for over a week, you can choose Liquid Funds.