Overnight vs liquid vs ultrashort: When to opt for which fund?

Short-term debt mutual funds are a popular investment option for investors looking for higher returns than bank fixed deposits while also maintaining higher levels of capital safety compared to equity investments. However, within short-term debt funds, there are different categories – overnight funds, liquid funds, and ultrashort-duration funds – that vary in terms of the minimum investment tenure and risk levels. 

What are overnight, liquid, and ultrashort-duration funds?

Overnight funds, as the name suggests, invest in debt and money market instruments with very short maturities of up to one day. They maintain high liquidity and aim to provide returns equivalent to daily bank deposit rates.  

Liquid funds have a slightly longer investment horizon of up to 91 days. Their portfolio includes debt and money market instruments with high credit quality and relatively low maturity of up to 91 days. 

Ultrashort-duration funds also maintain high portfolio quality but can take exposure to debt instruments with higher maturity of up to 6 months. Due to higher maturity, these funds have a higher potential to generate marginally better returns than liquid funds over the long run.

Factors to consider when choosing a short-term debt fund

Investment horizon 

The minimum investment horizon is the most important factor to consider. Overnight funds are suitable only for extremely short investment horizons of 1-7 days as you can withdraw your money the next day itself.  Liquid funds are ideal for investment horizons ranging from a week to three months. Their high liquidity allows quick exits. However, if redeemed before 7 days, you may face exit load charges. Ultrashort-duration funds have a slightly longer minimum investment horizon of 3-6 months due to higher average maturity. They are suitable for investors with moderately long investment horizons.

Expected returns 

Overnight funds returns aim to match overnight rates like MIBOR (Mumbai Interbank Offer Rate) and generate marginal returns over bank FDs. Liquid funds may offer slightly higher returns over overnight funds due to longer average maturity. Similarly, ultrashort-duration funds have the potential to give slightly higher annual returns than liquid funds due to the slightly higher but still very short average maturity of the portfolio. However, this small return differential also carries slightly higher interest rate risk.

Risk appetite

Overnight funds carry negligible risk of credit quality or interest rate due to very short portfolio maturity. Liquid funds also maintain high credit standards but slightly higher interest rate risk due to longer average maturity. Ultrashort funds have a marginally higher sensitivity to interest rate movements and slightly higher credit risk compared to overnight and liquid funds due to the higher average maturity of the portfolio.

Recommendations for different investor categories

Conservative investors 

For very low-risk investors requiring parking surplus cash on a daily or weekly basis like High-Net-Worth Individuals (HNIs), corporations, etc., overnight funds are most suitable due to highest liquidity and negligible risk. 

Liquid funds are also suitable for conservative investors with low to moderate risk appetite looking to invest for 2-3 months like retired individuals, salaried class, etc.  

Moderate investors

For investors with a moderate risk appetite and investment horizon of 3-6 months such as salaried individuals saving for short-term goals, liquid funds still remain suitable.

Ultrashort-duration funds can also be considered for diversifying a portion of their short-term debt allocation to generate marginally higher returns over longer holding periods.

Aggressive investors  

Aggressive investors with a high risk appetite and investment horizons greater than 6 months can consider debt mutual fund categories with higher average duration like short-duration and medium-duration funds to maximise returns over the long term.


Short-term debt funds provide high safety and reasonable returns for parking short to medium-term savings. Overnight funds are most suitable for very short term parking of surplus liquidity of up to a week. Liquid funds are appropriate for short-term debt allocation with low risk across different investor categories. Ultrashort-duration funds can be a good choice for moderately long investment horizons of 3-6 months to earn marginally higher returns. Overall, the selection depends on the investor’s risk profile and investment horizon. 

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