Liquid funds are better than overnight funds

K. ARAVIND

The practise of investing in liquid funds instead of savings bank accounts has become widespread in recent times. However, due to the inclusion of substandard bonds in the portfolio, there has been a recent decline in the NAV (Net Asset Value) of some liquid funds.

 

Liquid funds are a category of mutual funds (debt funds) that invest in bonds. Liquid funds invest in very short-term bonds. Liquid funds are better suited for savings bank accounts than for short term investments. Liquid funds paid annual returns equivalent to bank fixed deposits over the past year.

 

No charges of any kind are levied for withdrawal of investment from liquid funds. Exit load is applicable if the investment is withdrawn from debt funds within a year but it is not applicable to liquid funds. The use of this medium by investors has increased as leading fund houses have introduced the facility of withdrawing deposits to bank accounts at any time.

 

However, this trend has been adversely affected by the recent decline in the returns of some liquid funds. This is because of the failure of some companies to repay their debentures. This has prompted investors to turn to overnight funds as these are less risky than liquid funds.

For those who are investing for a very short period of time, overnight funds may seem reasonable as there is no significant risk. The best feature is that the investment can be withdrawn in a short period of time without any loss in capital.

Overnight funds, as the name implies, invest in one-day bonds. When the investment in one bond is returned, it is deposited in the bond for the next day. It is very unlikely that the price will fall within a day or the return on investment will fall.

Investment firms are the ones who generally invest mainly in overnight funds. Such funds are used to ‘park’ the investment for a very short period of time. Some schemes in liquid funds have seen a decline in NAVs, which has led ordinary investors to turn their attention to overnight funds.

At the same time, liquid funds are a better investment option for ordinary investors than overnight funds. Liquid funds offer better returns than overnight funds. Investment firms invest only in quality bonds to ensure investment security and avoid a fall in NAVs. Highly rated bonds are selected and invested in. Such funds have not caused any loss to investors or reduced their profits.