Overnight Funds
According to SEBI, Overnight Funds are open-ended debt mutual fund schemes that invest in securities with a one-day maturity period. Essentially, these funds are a type of liquid debt fund.
At the start of each business day, the fund's Assets Under Management (AUM) consist primarily of cash. This cash is used to purchase bonds that mature by the next business day. Fund managers then reinvest the proceeds from these matured bonds in new overnight securities, perpetuating this investment cycle.
What is an Overnight Mutual Fund?
An Overnight Fund is a type of mutual fund that invests in securities that mature in one day. These funds are designed for short-term investments, offering investors an investment instrument to park their cash with the benefit of earning returns overnight.
Investors interested in these funds submit requests to buy or sell shares during the fund's trading hours. Securities within the portfolio reach maturity daily, and the fund manager reinvests the proceeds into new securities that will mature the following day. Because these funds' securities mature so quickly, they aren't subject to the same degree of interest rate or default risk that other debt funds might face. However, this low-risk characteristic generally results in lower returns.
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AUM ₹107 Cr •
Expense 0.08%
AUM ₹1110 Cr •
Expense 0.07%
AUM ₹9263 Cr •
Expense 0.06%
AUM ₹8439 Cr •
Expense 0.08%
AUM ₹2512 Cr •
Expense 0.06%
AUM ₹2981 Cr •
Expense 0.06%
AUM ₹5661 Cr •
Expense 0.08%
AUM ₹4600 Cr •
Expense 0.06%
AUM ₹8826 Cr •
Expense 0.08%
AUM ₹146 Cr •
Expense 0.09%
AUM ₹821 Cr •
Expense 0.07%
AUM ₹1146 Cr •
Expense 0.05%
AUM ₹653 Cr •
Expense 0.09%
AUM ₹6025 Cr •
Expense 0.06%
AUM ₹306 Cr •
Expense 0.07%
AUM ₹72 Cr •
Expense 0.1%
AUM ₹402 Cr •
Expense 0.06%
AUM ₹1019 Cr •
Expense 0.07%
AUM ₹9880 Cr •
Expense 0.1%
AUM ₹20132 Cr •
Expense 0.07%
Key Features of Overnight Mutual Funds
Overnight Funds are debt funds that invest in securities with a maturity of one business day. This unique feature makes them a highly liquid and low-risk investment option. Here are some key features of Overnight Funds:
Brief Investment Duration: Overnight funds have a maturity period of just one day, allowing investors to utilise their surplus cash effectively.
Minimal Risk: Due to their short maturity period, these funds have limited exposure to risk, maintaining risk at minimal levels.
Exceptional Liquidity: Recognised as among the most liquid investment options, Overnight Funds enable quick and easy access to invested capital.
How Does an Overnight Fund Work?
Overnight Funds operate by investing in securities that mature within 24 hours. At the end of each trading day, the fund manager allocates the pool of cash into these short-term securities, and by the next day, the investments mature. The returns, albeit small due to the short investment period, are added back to the fund, and the capital is reinvested the following day. This cycle repeats each business day.
Advantages of Investing in Overnight Funds
Here are some benefits of investing in an Overnight Fund:
Security: Overnight Funds invest in high-quality securities like T-Bills (sovereign-rated), making credit risk almost negligible.
Liquidity: An Overnight Fund provides high liquidity, allowing investors to access their money quickly.
Stability: This fund also offers stable returns compared to other types of funds that face significant market fluctuations.
Risks of Investing in Overnight Mutual Funds
While investing in Overnight Funds comes with several benefits, it also has some drawbacks that investors must be aware of:
Lower Returns: Generally, the returns on Overnight Funds are lower than those on other short-term investments.
Operational Risk: Involves risks related to managing the fund's operations, including settlement and transaction errors.
Who Should Invest in an Overnight Mutual Fund?
Overnight Mutual Funds are ideal for:
Corporate Treasuries: Entities looking to manage their surplus funds efficiently.
Individual Investors: Those seeking a low-risk option for short-term investments.
Risk-Averse Investors: Individuals who prefer stability over high returns.
Factors to Consider Before Investing in Overnight Funds
Before investing in Overnight Funds, consider the following:
Yield: Understand the expected return, which is typically lower compared to other mutual funds due to the low risk.
Fund Manager's Track Record: Check the performance history and expertise of the fund manager handling the Overnight Fund.
Liquidity Needs: Ensure that the fund’s liquidity aligns with your cash flow requirements, as these funds are highly liquid.
Costs and Fees: Review any associated fees or charges that might impact overall returns.
Taxation of Overnight Funds
The taxation of Overnight Funds follows the same structure as other debt funds, with tax treatment varying based on the investment date and the holding period. Here's how it works:
Invested Before April 1, 2023:
Short-Term Capital Gains (STCG): If units are held for less than 24 months, any gains realised from selling these units are classified as short-term capital gains. These gains are taxed according to the investor's applicable income tax slab rate.
Long-Term Capital Gains (LTCG): For units held for more than 24 months, the gains are classified as long-term capital gains and are taxed at 12.5%.
Invested After April 1, 2023:
For all investments made on or after April 1, 2023, both STCG and LTCG are taxed at the investor's applicable income tax slab rate, irrespective of the holding period. This means that the distinction between short-term and long-term gains no longer applies, and all gains are subject to the investor's marginal tax rate.
How to Invest in Overnight Funds?
You can invest directly in Overnight Funds through the asset management company's website. Alternatively, you can use INDmoney to invest online in the best Overnight Fund in a few easy steps:
- Open the INDmoney app and log in with your credentials.
- Go to the "Mutual Funds" section within the app.
- Use the filter options to select "Overnight Mutual Funds" to see the available options.
- Choose between a lump sum investment or a Systematic Investment Plan (SIP) for ongoing investments.
- Enter the amount you wish to invest and confirm the transaction.
Frequently Asked Questions
Overnight mutual fund schemes invest in debt securities with a maturity of one day. Unlike traditional debt funds, which may have longer-duration instruments and are subject to higher risks, overnight mutual funds have a very short investment horizon, making them ideal for investors looking for low-risk, short-term parking of funds.
Overnight funds carry minimal credit risk because they invest in highly secure, short-term debt securities that mature within one day. However, it's essential to note that although credit risk is low, investors should still be aware that no investment is completely risk-free.
Overnight funds are similar to liquid funds but with an even shorter duration. While liquid funds can hold securities with up to 91 days of maturity, overnight mutual funds invest in securities that mature the next business day, reducing credit risk and interest rate risk further.
The expense ratio for overnight mutual funds is typically lower than other mutual fund types, as the fund manager primarily focuses on very short-term, low-risk investments. However, investors should still review the expense ratio to ensure it aligns with their investment goals.
While generally safe, Overnight Funds are not entirely risk-free. However, losses are rare due to the high quality of the underlying securities.
No, like all mutual funds, Overnight Funds do not guarantee returns.
Yes, Overnight Funds could be ideal for investors with a very short investment horizon, as they offer liquidity and low credit risk. These funds are usually used for temporarily parking funds with minimal exposure to market volatility.