Overnight Mutual Funds

Investors with a super-low investment horizon can invest in overnight funds. These funds can be sold on the next day or any day you want.
If you are looking for a better investment option than a current account, overnight funds will suit you well. Corporate establishments and large financial institutions invest their idle or surplus cash in these funds for a few days until they need it for working capital requirements.
Investors looking to reap the benefits of STP or Systematic Transfer Plan can invest in overnight funds. Investors can transfer their money from an overnight fund to equity or pure debt funds using the STP facility.
Although retail investors can also invest in some of the best overnight funds, they prefer liquid funds. Liquid funds are like overnight funds, but they usually provide higher returns than overnight funds. Also, the credit and interest rate risks of liquid and overnight funds are similar.
Any investor willing to understand the fundamentals of the debt market before investing more money.
Any investor willing to get better post-tax returns than bank fixed deposits.
Any investor looking for a 100% liquid investment option with no exit load or fee for withdrawing prematurely.

Risk-Free – Since overnight funds invest in debt instruments like debt securities, Reverse Repos, and CBLOs with one-day maturity, capital loss risks are minimal.
Extraordinary Liquidity – Like liquid mutual funds, overnight funds are 100% liquid, meaning investors can withdraw their money any time without paying any exit load.
Profit From Interest Rate Fluctuations – Overnight fund returns are directly proportional to interest rates. In a falling interest rate regime, overnight fund value declines. Conversely, these funds generate high returns when the interest rates rise.
Classification – According to SEBI, all funds in overnight mutual fund schemes are treated as ‘cash and cash equivalent.’ The portfolio of overnight funds changes every day. Moreover, overnight funds cannot invest in risky and volatile debt instruments.

Money at Disposal
If you have some idle funds with you, you can look for investment options and earn a good return. Investing in overnight funds will allow you to earn more and gain some returns on the money sitting idle with you. Overnight funds allow you to earn profits within a short time frame.

Risk
Different investors have different risk-taking capabilities. Before investing in an overnight fund, the investors should understand the risks associated with the investment. While overnight funds are safe, they might have some risks.

If you are looking for short-term investments and are willing to take a moderate risk for the returns, you can invest in overnight funds. Also, if you take a conservative approach to risks, you can invest in overnight funds.

Market Volatility
Before choosing a fund to invest in, you must check the market volatility and how often it changes. Overnight funds have minimal impact if the interest rate changes or your credit ratings change.

The horizon of the investment in overnight funds is relatively short. Hence, you are protected against risks like changes in interest rates, credit risk, etc. The short horizon protects the investors against market volatility.

Liquidity
Before you invest in any fund, you must check how easily you can liquidate them. Overnight funds are very liquid. You can get back your money quickly without paying any exit load. Also, you will not have to compromise on the total investment amount.

Financial Objectives
Before investing in a particular fund, you must chalk out your financial objectives. If you are looking for a steady income for a mid or long-term, overnight funds might not be ideal. However, if you want quick money in a week or so, you can invest your money in overnight funds. Also, this might be a good choice if you are not an active investor and want to test the market.

Before you invest in an overnight fund, try to read about it. Before choosing an overnight fund, you must understand the risk and reward aspects of the investment.

Regarding STCG, any profits made by the investor are taxed according to the investor’s tax slab. So, if your income falls in the 30% tax bracket, you will need to pay 30% tax on the profits from overnight funds. However, LTCG is taxed at a flat rate of 20% after indexation. Indexation refers to adjusting the returns against inflation during the period. Also, if you receive any dividend from the scheme, it will be taxed as per your existing tax slab.

Hence, before investing, consider the returns’ taxability to maximise profits.

Sensitivity to Interest Rate – Although not commonly seen, overnight funds are quite sensitive to interest rates. For instance, if you invest at 10 AM today and the RBI decides to reduce the rates at 3 PM, your scheme returns may decrease considerably. Conversely, if the RBI decides to increase the rates, you may benefit from the sudden jump in the fund value.
Returns are Not Too High – Overnight funds are not good instruments for long-term investment. They typically provide a little higher returns than bank savings or current accounts. So, liquid funds will be a good choice if you want to earn higher returns and invest in a fund closely resembling overnight funds.
Credit Risks Cannot Be Ruled Out – While this scenario is highly unlikely and has never happened before, all debt funds are subject to credit risks. If the issuer of the underlying asset defaults on the payment on instrument maturity, the investor may lose a part of their investment.
Lack of Control – Overnight funds are generally managed by fund managers who oversee the portfolio selection process. Hence, although you are an investor, you cannot influence the debt instrument selection in any way.

Safe Returns – Since the investment term of overnight funds is much lesser than conventional mutual funds, the risks of capital loss are minimal.
Idle Fund Utilisation – While the minimum term of a bank fixed deposit is seven (7) days, overnight funds mature after one day. Hence, investors with huge capital prefer investing in these funds to grow their capital before needing the money.
Less Volatility – Traditional debt funds are more exposed to credit or interest rate risks than overnight funds. Since an overnight fund’s portfolio changes every day, it safeguards investors from a sudden jump or fall in interest rates and also credit and liquidity risks.
100% Liquid – Mutual fund houses do not levy any entry or exit load on overnight funds. Hence, the investment cost of overnight funds is zero. Moreover, you can withdraw your money any time you want.