The importance of liquidity in overnight funds

overnight funds: Now investors have an additional reason to consider overnight  funds - The Economic Times

Investing in mutual funds can be a great opportunity to grow your wealth, but it’s important to focus on liquidity when selecting your investments. You can’t predict when you will need access to your money, making liquidity a top priority in your investment strategy. 

Overnight funds, in particular, are favoured by investors who value liquidity in their portfolio. These funds mature in just one day, giving you quick access to your cash when you need it most. However, the importance of liquidity in these funds goes far beyond the simple convenience of having your money readily available. 

Here are four more points highlighting the importance of liquidity in overnight funds and how you can prioritise it in your own portfolio.

1. Flexible cash management

Overnight funds hold high-quality and highly liquid money market instruments, so there is negligible credit risk. This helps you redeem the funds quickly when the need comes. 

Since these mutual fund schemes mature in a day, they are an ideal investment for short-term cash management needs. This is crucial for managing unexpected expenses or taking advantage of profitable investment opportunities that arise in the market. This flexibility gives you more control over your finances as you know that you have immediate access to funds to utilise for any purpose.

2. A better way to park idle funds

As an investor, it is natural to look for ways to maximise the potential of your hard-earned money, even when they are lying idle. This is where the importance of liquidity in overnight funds matters more. These funds offer the much-needed flexibility and accessibility to your invested funds without the need to hold them up for long periods.

The best part is you get to earn better returns than a traditional savings account, making overnight funds a valuable option to earn a little extra on your cash reserves.

3. Risk management

Overnight mutual funds invest in short term debt instruments and, thus, need high liquidity to meet the redemption demand. Liquidity becomes more important during times of market volatility, when investors may withdraw their positions in high volume. In such a situation, overnight funds help by providing readily available cash to meet redemption requests without incurring unnecessary losses for the investor.

4. You can capitalise on new investing opportunities  

The liquidity feature of overnight funds is particularly important for investors who are looking to diversify their portfolios. By investing in overnight funds, you can quickly and easily switch to other investment schemes like equity mutual funds to earn higher returns. Stock market is unpredictable where asset prices can fluctuate rapidly, so investors should be able to move their money quickly to take advantage of new opportunities. 

To wrap up

Liquidity is an important feature of overnight funds that most investors prioritising safety and flexibility look for. With low volatility and high liquidity, these funds provide a quick exit option and help investors park their surplus fund while earning decent returns, deal with emergency requirements of funds or switch to other schemes. 

Remember that overnight funds are only a single component of a successful investment portfolio, and diversification is key. Allocating your funds across different mutual fund investment plans is helpful to mitigate risk and maximise long-term returns. You can even consult a financial advisor to get personal advice on best investment strategies according to your goals, risk tolerance, and time horizon.  

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