There is always a limit, you can't just overclock until you get infinite performance.
Usually the chip either becomes too hot, or a barrier is reached (like the motherboard can not provide a high enough stable clock). Better cooling such as the water or air is used to raise the first barrier - the second on is pretty difficult to get past, usually requires over-volting the components or just getting better ones.
Because a decent water cooling setup beats a decent air cooling in terms of pure cooling- it is generally regarded as a better cooling system for overclocking. However, high end air coolers such as the Thermalright Ultra 120 Extreme (TRUE) and the Titan Fenrir can cool as well as mid end water - but it can get loud.
If you are new to overclocking, get a decent air cooler like the ones I described above and give overclocking a go. If you like it and gain some confidence (and money) then you can get a watercooling setup for better temperatures and a quieter PC.