Why investors should consider overnight and liquid funds amid falling savings rates?

With more banks expected to lower interest rates on savings accounts following another lender’s example, investors have a strong reason to park idle cash in overnight or liquid funds.

WHY ARE FINANCIAL PLANNERS ASKING INVESTORS TO PARK MONEY IN OVERNIGHT AND LIQUID FUNDS?

The central bank has cut repo rates by 100 basis points this calendar year. This has led to a large public sector bank making the first move and reducing its savings bank interest to 2.5%. Other banks are expected to follow soon. Compared to this, overnight and liquid funds could help investors earn 5-5.5%.

HOW COULD INVESTORS PARK SURPLUS MONEY?
Many investors let idle money lie in their savings bank account, which earns less. Financial planners feel investors could keep a small amount of essential money in their savings account for immediate needs or emergencies, and keep the rest in a liquid or overnight fund. They should keep in mind that money kept in a savings bank can be withdrawn without any delay, while money in a liquid or overnight fund will come back to them on the next working day

WHERE DO OVERNIGHT AND LIQUID FUNDS INVEST THE MONEY? IS THERE ANY RISK?

Overnight funds have a portfolio that invests in securities that mature in a single day, while liquid funds invest in debt and money market securities that mature within 91 days. The portfolio largely consists of short-term instruments like treasury bills and government securities. These schemes carry the lowest risk and minimum volatility in the category of mutual funds. This is because they generally invest in instruments with a high credit rating (P1+). The net asset value of these funds sees a change to the extent of interest income accrued.

WHAT IS THE TIMEFRAME AND MINIMUM AMOUNT NEEDED TO INVEST IN THESE FUNDS?

Financial planners suggest investors should consider overnight funds if they have a timeframe of one day to a week, while they can use liquid funds if they have 7 days to 3 months. Liquid funds levy a graded exit load of 0.0070% to 0.0045% if investors withdraw money before 7 days. Most funds accept amounts as low as `500 as a lumpsum investment

WHAT RETURNS CAN AN INVESTOR EXPECT FROM OVERNIGHT AND LIQUID FUNDS?
As per data from Value Research, over the last one year, the liquid fund category has given an average return of 6.92%, while overnight funds have returned 6.33%.

HOW ARE THESE FUNDS TAXED?
Once these units are redeemed, the income earned is added to an investor’s total income and taxed as per his tax slab.