Overnight Funds

What are Overnight Funds?

Overnight funds are the most recent addition to India's available mutual fund (MF) categories. These open-ended funds invest in debt securities, Reverse Repos, and Collateralized Borrowing and Lending Obligation (CBLOs) with one-day (overnight) maturity.

Although retail investors can invest in overnight funds, these MFs are preferred by big institutional investors and corporate houses. Overnight funds returns are higher than current bank accounts and are less riskier than equity funds since they have minimal default and credit risks. The biggest advantage of overnight funds is that they are 100% liquid and can be bought and sold on the same day.

Who Should Invest in Overnight Funds?

Overnight funds are the best investment instrument for high net worth investors and big financial institutions. These funds provide them with higher returns than conventional bank current deposits. Here is a lay down on the types of investors who prefer to invest in 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.

Features of Overnight Funds

  • 1-Day Maturity – Overnight funds are debt instruments with a maturity of one day. So, investors often move their capital from a current account to overnight funds to earn interest.
  • 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. 

Taxability of Overnight Funds 

The best overnight funds are more tax-efficient than many other investment options. Overnight fund returns may attract two types of taxes – Short-Term Capital Gains (STCG) tax and Long-Term Capital Gains (LTCG) tax. Since these funds are classified as ‘Debt Funds,’ the STCG applies on withdrawals made before three years while the LTCG applies on withdrawals made after three years. 

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.

Risks Involved With Overnight Funds

Overnight funds are mostly known for their benefits, as the holding period is generally no more than a day. But, despite such fascinating benefits, there are also some downsides of investing in overnight funds: 

  • 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. 

Advantages of Overnight Mutual Funds

The following are the top benefits of investing in overnight funds:

  • 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. 

Who Are These Funds Suited For? 

Overnight funds are debt funds that get their returns from debt securities. These funds have an overnight maturity. These open-ended funds have a residual maturity of day. The fund is quite flexible and is a liquid form of different debts. If you are interested in investing in overnight funds, you need to place a request for the purchase and the redemption of the funds during regular business hours. 

These funds are ideal for risk-averse investors looking for short-term investments and short-term gains. If you want a weekly investment option, you can invest in short-term funds like overnight funds. You can even hold these securities for a day. These funds are ideal for investors who want flexibility with their investments. 

Here is a list of factors that you should consider before investing in overnight funds:

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.

Best Overnight Funds

Many investors are now getting inclined toward investing in overnight funds. They promise decent returns in a week or even a day. Let’s have a look at some of the best overnight funds that you can try investing in: 

SBI Overnight Fund Direct-Growth

The SBI Overnight Fund is a debt fund with very low risk. The 3-year annualized returns for the fund are 3.64%. The AUM or the fund size of this overnight fund is INR 27,978.24 crores as on 17th August 2022. If you decide to hold the SBI overnight fund for five years, your money will tend to grow by 10.35%. The one-year annualized return of this fund is 3.7%. The holdings of this fund are with the Reserve Bank of India, and all the returns come from investments in the financial sector. Also, the fund does not have an exit load. The returns on the investment are taxed as per your income slab.

  • Minimum investment: INR 5,000 for lump sum investment, INR 2,000 for SIPs
  • Fund’s performance: Currently, the fund is performing at par with all the other overnight funds in the category. While the one-year annualized return of the fund is 3.64%, the 3-year and the 5-year annualized returns are 3.6% and 4.6%, respectively.

HDFC Overnight Fund Growth 

The low-risk overnight fund by HDFC is a debt fund. The NAV is INR 3,208 as on 17th August 2022. In 5 years, your money will grow by 25.21% if you invest in this overnight fund by HDFC. All the holdings of the fund are with the Reserve Bank of India. Hence, the returns on investment come from the financial sector. Also, the investment instruments used here are T-bills. The AUM of the fund is INR 21,845 crore which is quite high compared to the overnight funds in the category. 

  • Minimum investment: INR 100, no specific amount for SIPs
  • Fund’s performance: The one-year annualized return of the fund is 3.7%, while the 3-year and 5-year annualized returns stand at 3.6% and 4.6%. The one-year annualized return is better than the category average. However, the 3-year and the 5-year annualized returns are a little less when compared to the category average.

Axis Overnight Fund Direct-Growth

Axis bank has some of the best debt funds, and the Axis Overnight Fund is one of them. This debt fund comes with shallow risk and promises steady returns in the future. The NAV is INR 1,142.33 as on 17th August 2022, and the AUM of the fund is INR 10,814.38 crores. You can make a one-time payment to the fund as the fund does not support SIPs. In 3 years, your investment will see a growth of 11.45%. The Reserve bank of India has significant shareholdings, and the fund is a 100% debt fund.

  • Minimum investment: INR 500, No SIPs for this fund
  • Fund’s performance: The fund’s one-year annualized return performance is better than the category average as it gives 3.8% compared to the 3% average. However, the 3-year annualized return is not better than the category average. The category average stands at 4.4%, while the fund’s returns are at 3.7%.

PGIM India Overnight Fund Direct-Growth 

This low-risk debt fund by PGIM has been consistent since its inception. The NAV and the AUM of the fund are INR 1,115.34 and INR 112.95 crores, respectively. The three months return rate of the fund is 1.2%, while the 6-months return rate is 2%. The one-year annualized return of the fund is 3.8%. The Indian Bank and the Reserve bank of India are significant holders, and their incomes come from investments in the financial sector. The fund has no exit load, and the expense ratio is 0.1%. As people invest in overnight funds for a short duration, the taxes will be applicable as per your income slab.

  • Minimum investment: INR 5,000 for lump sum investment, INR 1,000 for SIPs
  • Fund’s performance: Currently, the one-year annualized return rate is at 3.8%, which is relatively better than the category average. The return rate for the category average stands at 3.0%. The fund is 2nd best in the category for three months’ returns.

Sundaram Overnight Fund Direct-Growth

The overnight debt fund by Sundaram is a low-risk overnight fund. The NAV of the fund is INR 1,148.16, while the AUM is INR 573.72 crores as on 17th August 2022. Your investments will grow by 11.39% if you hold the fund for three years. The fund invests in the financial sector, and the holdings of the fund are with the Reserve Bank of India. The fund’s expense ratio is 0.10%, and there is no exit load. Dwijendra Srivastava and Sandeep Agrawal manage the fund.

  • Minimum investment: INR 5,000, SIPs not supported.
  • Fund’s performance: The one-year annualized return of the fund is 3.7%, which is better compared to the category average of 3.0%. The overall return of the fund is 4.1%. The category average for 3-year annualized returns is 4.4%, while the fund is yielding a return of 3.7%.

Franklin India Overnight Fund Direct-Growth

Franklin India Overnight Fund is one of the best-performing overnight funds. Pallab Roy and Umesh Sharma manage this low-risk debt fund. The NAV of the fund is INR 1,128.19, and the fund size is INR 185.25 crores as on 17th August 2022. You make a lump sum and a SIP investment to the fund. The investments grow by 5% in 3 years. However, the fund gives a return of 0.91% in 6 months. The expense ratio is 0.09% for this fund. You will have to pay an income tax on the short-term gains from this fund. The holding analysis states that the fund is earning its returns from multiple sectors. 

  • Minimum investment: INR 5,000 for a lump sum and INR 500 for SIPs
  • Fund’s performance: The fund performs better than its peers as the one-year annualized return is 3.7%. The fund’s overall return is 3.7%, and the absolute return is 12.8%. 

UTI Overnight Fund Direct-Growth

The UTI Overnight Fund is an overnight debt fund with low risk. If you are looking for short-term returns, you can invest in this overnight fund. The one-month return of the fund is 0.42%. The fund size is INR 8681.05 crores as on 17th August 2022. The NAV stands at INR 2957.55 as on 17th August 2022. The fund comes with 0 exit load. Amit Sharma has been the fund manager of this overnight fund since 2018. The Reserve Bank of India and the Clearing Corporation of India have the holdings in the fund, and it earns the returns from the financial and other sectors.

  • Minimum investment: INR 500 for lump sum investment, INR 500 for SIP
  • Fund’s performance: The one-year annualized returns of the fund are higher than the category average by 0.71%. However, the 3-year and 5-year annualized returns are lower than the category average.

Aditya Birla Sun Life Overnight Fund

The low-risk overnight fund by Aditya Birla Sun Life is a debt fund. The performance of the fund has remained consistent for quite some time. The fund size is INR 15,421.45 crores, and the NAV is INR 1,168.48 as of 17th August 2022. The fund has a rating of 4 stars, and your investment will increase by 11.42% in 3 years. The major holdings of the fund are with the Reserve Bank of India. The fund has an expense ratio of 0.08%.

  • Minimum investment: INR 5,000 for a lump sum; SIPs are not supported.
  • Fund’s performance: The one-year annualized return rate of the fund is 3.7%, while the category average is 3%. The overall return rate is 4.2%.

Canara Robeco Overnight Fund

Canara Robeco is known for its tax-saving funds. However, they have an overnight fund, too, with good returns. The low-risk debt fund is ideal if you are looking for short-term gains. The AUM and the NAV of the fund are INR 202.62 crores and INR 1,118.38, respectively. The investment grows by around 11.42% if you keep it invested in the fund for three years. The National Bank for Agricultural and Rural Development has the fund’s significant holdings. 

  • Minimum investment: INR 5,000, SIPs not supported.
  • Fund’s performance: The annualized return for one year, three years, and five years is 3.7%. The absolute returns of the fund in 3 years are 11.4%. While the one-year annualized average is good, the 3-year annualized average is lesser than the category average by 0.74%.

Edelweiss Overnight Fund

The Edelweiss Overnight Fund is suitable for those looking for modest returns in a short time frame. The low-risk debt fund has a 3-year annualized return of 3.72%. While the fund size is INR 753.31 crores, the NAV stands at INR 1,119.76 as on 17th August 2022. Your investments will grow by 5.25% in 3 years. The absolute return of the fund for three years is 11.6%. The fund’s expense ratio is 0.11%, and stamp duty of 0.005% is applicable. Rahul Dedhia and Pranavi Kulkarni manage this overnight fund by Edelweiss.

  • Minimum investment: INR 5,000 for lump sum investments, INR 500 for SIPs.
  • Fund’s performance: In 6 months, the return rate the fund yields is 2%. It increases to 3.7% in a year. The return rate is almost consistent for 3-year and 5-year annualized returns.

Frequently Asked Questions

Yes, the returns on overnight funds are taxable. However, they are more tax efficient as compared to other investment options. The tax rates depend on the period for which you hold the funds. If you hold the funds for less than three years, you must pay a Short-Term Capital Gains Tax on the returns. The Short-Term Capital Gains Tax rate will be decided based on the income slab of the investor.

However, if you hold the fund for more than three years, you will have to pay a Long-Term Capital Gains Tax at a flat rate of 20%.

Any interest changes will impact the overnight funds directly. For instance, if you make the investment at 1 AM today and the RBI reduces the interest rate at 4 PM on the same day, the returns on the overnight fund will decrease substantially. However, your returns will increase considerably if the RBI increases the interest rate within the same day.

There are several benefits of investing in overnight funds. The overnight funds are held for a shorter period. Hence, they are secure, and you do not lose a lot of capital in case of interest fluctuations. Also, if you have a lot of idle funds and want to earn some returns on them, you can invest them in an overnight fund.

Several overnight mutual funds are performing well. Some of the best-performing overnight mutual funds of the year are UTI Overnight Fund, SBI Overnight Fund, and HDFC Overnight Fund.

Investors should look at the fund’s expense ratio before investing in overnight funds. They have a short maturity period. Hence, you must try to calculate a weekly return for your investment. Another factor that you must look at is the rate of returns.

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