Overnight Mutual Funds: Top Advantages Of Overnight Funds In India (Updated 2023)
Overnight mutual funds are the fifth most popular debt funds, after liquid schemes, corporate bond schemes, short-duration and low-duration funds. These funds cover about 8% shares across the Assets Under Management (AUM) of debt open-ended schemes (as of March 31, 2020).
Wonder who should opt for these mutual funds? Keep reading to get an overview of overnight mutual funds!
What Are Overnight Mutual Funds?
According to SEBI, overnight funds are open-ended debt funds that park investments into overnight securities with a maturity period of 1 day. It is a specific debt fund with very high liquidity. Investors wishing to invest in such funds place a purchase and retrieval request to select overnight funds during business hours.
At the start of each trading day, the AUM of these funds is in cash. The securities are bought overnight and mature by the following working day. A fund manager gets the cash amount to purchase more of such instruments overnight− the cycle goes on.
Features of Overnight Funds
The characteristics of overnight funds are as follows:
1. Short-term Investment
These schemes mature in one day. This short horizon enables investors to use their additional cash effectively.
2. Highly Liquid
These funds are considered the most liquid instruments. It helps investors access their funds quickly and efficiently.
3. Low Risk
An instant maturity and short investment horizon minimize the risk factor considerably.
How do Overnight Mutual Funds Work?
To know the working of overnight funds one must understand where they invest and their sources of income:
- Where do Overnight Funds Invest: Overnight mutual funds invest in specific debt instruments as per stringent SEBI norms. These include collateralised borrowing and lending options (CBLO), overnight reverse repos and various debt and money market instruments. The debt instruments in a fund’s portfolio are replaced every day by new overnight assets. Fund managers invest in debt securities that have very low chances of default.
- Earnings: The only source of earnings in the case of overnight mutual funds is interest received on overnight debt securities. As assets mature in a day there is no scope of capital gains arising from them. The interest is dependent on borrowing rates. When there is excess short-term liquidity in the market and interest rates fall, the overnight borrowing rate also falls and vice versa.
Advantages of Overnight Mutual Funds
1. Quick returns
These funds are favourable investment avenues for investors who wish to utilize their extra money to earn a greater profit at the lowest risk. Unlike most fixed deposits and bank deposits with extended maturity, these schemes enable investors to create gains in a short span.
2. Safe investment
Variations in a borrower’s credit ratings or RBI’s interest rate changes have little to no impact on such funds. The short horizons of the schemes protect the investors from uncertainty against liquidity, credit risk and interest rate fluctuations. Overnight mutual funds also keep the investors safe against market volatility.
3. No exit load
Since these funds do not have any exit load, they are more liquid. Investors can liquefy the investment during emergencies without compromising the principal amount.
Also read: Open-Ended Mutual Funds
How to Choose the Best Overnight Fund
Choosing an overnight mutual fund or be it any mutual fund should depend on your investment goals and horizon and your risk appetite. Though these funds are considered to be less risky than others, still you should know that mutual funds are subject to market risk. So, before choosing a fund, make sure to check its historic returns, expense ratio, performance over the past few years, etc. If possible, ask a seasoned investor or fund advisor to get a better idea regarding which fund to invest in.
Who Should Invest in Overnight Funds?
This fund is ideal for individuals who want to make an investment for 1 week or less since the fund units are redeemable after a day. Additionally, these open-ended liquid schemes are a suitable option for investors with a low-risk appetite.
Some individuals don’t want to take risks until they invest in equity funds. An investor interested in moving to equity mutual funds can use STP (Systematic Transfer Plan) to route investments in an equity scheme.
Investors willing to diversify their portfolios can opt for Navi Liquid Fund to get up to twice the returns of a savings account. Navi allows investors to park their funds temporarily with almost negligible risks for investments of up to 30 days.
So, you can start investing in this fund via Groww, Kuvera, Zerodha, INDMoney and Paytm Money. Besides, this fund house doesn’t levy exit load and charges a meagre expense ratio. Keep your investment goals in mind while investing!
How to Invest in Overnight Mutual Funds in 3 Steps?
1. Investing in an Overnight Fund through a Regular or Direct Plan.
Here are steps to invest via direct plan:
- Step 1: Visit the portal or branch office of the AMC. Some fund houses also allow you to invest through their mobile application.
- Step 2: You need to complete the KYC formalities online or offline and fill out the application form.
- Step 3: Next, you must choose the mutual fund scheme and transfer the requisite amount from your bank account to invest in that particular mutual fund scheme.
2. Investing in Mutual Funds Online Investment Platforms/Mobile Applications
Here are steps to invest in an overnight mutual fund through a regular plan:
- Step 1: Contact the intermediary or broker offering overnight mutual fund schemes.
- Step 2: Complete the KYC formalities either online or offline and upload the relevant documents.
- Step 3: Next investors must choose the overnight mutual fund scheme and transfer the investment amount through a cheque or via any electronic payment method. This successfully completes the purchase of the mutual fund units.
Overnight Mutual Fund Tax Implications
Taxes on overnight funds are the same as those on debt schemes. The tax proceeds are as follows:
- If scheme units are held for more than 36 months, the investment is subject to long-term capital gain taxation. The tax rate on these funds is 20% after indexation adjustments. Indexation inflates the fund’s purchase price through the cost inflation index.
- When units are held up to 36 months, investment earns short-term capital gains. An investor’s income tax return (net) includes these gains. The tax depends on the income bracket of the individual.
Also read: Lump-sum Investment in Mutual Funds
Things to Consider Before Investing in Overnight Mutual Funds
Investors must keep the following things in mind before investing in an overnight mutual fund:
1. Returns
Individuals must consider the return component before going for overnight funds. They do not provide high returns but act as a safe investment option in the debt category. There are many fund schemes offered in the markets so one must choose that overnight fund which provides decent returns consistently.
2. Investment Goals
Individuals must also consider their investment goals while choosing an overnight mutual fund. The investment objective and risk profile of such schemes must be in line with their financial goals.
3. Expense Ratio
Different fund houses charge varied expense ratios for mutual fund schemes offered by them. Investors must thoroughly compare the expense ratio of different overnight funds and go for that option that comes with a low expense ratio.
4. Fund Manager’s Performance
All the mutual funds are professionally handled by fund managers. Every decision taken by a fund manager will affect the performance of the overnight fund. Hence, it is important for investors to choose a scheme that is managed by a fund manager having a proven track record.
5. Risk Appetite
Overnight funds are relatively safe investment options as the instruments in which they invest are highly reliable and have low chances of default. It is an appropriate investment option for risk-averse investors. However aggressive investors hoping for higher returns may not find it to be a feasible option.
Final Word
Before investing in overnight mutual funds, an individual needs to understand how they function in various situations. Investors, having clarity in the risk-return aspects of mutual funds, will know what to expect from this specialized debt fund category.
FAQs
Ans: As per SEBI guidelines, overnight debt funds invest in securities like CBLOs, overnight reverse repo and some other money market instruments that mature within a day. A portfolio consisting of overnight assets is replaced with new debt overnight assets each day. These schemes do not invest in risky debt securities or deposits.
Ans: These debt funds earn through interest payments on their holdings. The returns generated on these schemes reflect overnight lending and borrowing rates. With abundant short-term liquidity and a decline in interest rate, overnight rates fall and vice versa.
Ans: Take note of the following things before investing in these funds:
– Exit load or exit fee of the fund scheme
– Scheme’s expense ratio
– Fund manager’s experience
– Direct plan or regular plan
– Holdings in the portfolio
Ans: Assets Under Management or AUM refers to the assets’ total market value that a fund house manages at any given time. It includes the capital for new investments as well as the returns on investments.
Ans: An expense ratio refers to a certain percentage of the investment paid to a fund house as annual operating fees. The fund manager advertises, manages and allocates the fund units to manage risks and maximize returns. The maintenance charges include management fees, 12-1b distribution costs and administrative costs.
Ans: The minimum amount varies for different mutual fund schemes. Many fund houses allow you to start investing in overnight funds with an amount as low as Rs. 500 through an SIP.
Ans: There is no minimum limit on the number of overnight mutual fund units that investors can redeem in one go. However, investors may be liable to pay an exit load if they withdraw from a scheme within a certain time period. The exit load varies from one mutual fund scheme to another.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
