What are Overnight Mutual Funds and How to Invest in them?
Launched in 2018, overnight funds are open-ended debt funds that invest in debt securities having a maturity period of 24 hours. Unlike other debt schemes, they come with negligible interest rate risk or default risk. Overnight funds are best for utilizing idle fund reserves.
Here’s a list of top overnight funds you can invest in, benefits, and things to keep in mind before investing. Read on!
What are Overnight Funds?
Overnight funds are open-ended debt funds that invest in overnight assets or securities with residual maturity of one day. As the securities in the portfolio mature everyday, the fund manager uses the proceeds to buy new securities that will mature the next day. Fund managers keep on using the cash amount to purchase overnight bonds each day and the cycle continues.
As the securities in these funds mature the very next day, these funds do not get exposed to any sort of interest rate risk or risk of default as is present in the rest of the debt funds. However, a lower risk factor means they offer least returns as well. This is a new category of debt fund that was introduced in 2018 as a part of SEBI’s mutual fund reclassification exercise.
Overnight funds will invest your money in different debt securities that have a maturity of just one day. According to SEBI regulations, overnight mutual funds cannot invest in financial instruments having a maturity period of more than a single day.
The portfolio of these funds will change every day as the underlying securities keep maturing the following day. New securities will consistently keep replacing old ones each day. In other words, when the debt instruments in a fund’s portfolio mature overnight, your fund manager will replace them with fresh overnight securities. The AUM (Assets Under Management) will rise slightly because of the interest payment from these securities.
How Do Overnight Funds Work?
Overnight funds will invest your money in different debt securities that have a maturity of just one day. According to SEBI regulations, overnight funds cannot invest in financial instruments having a maturity period of more than a single day.
The portfolio of these funds will change every day as the underlying securities keep maturing the following day. New securities will consistently keep replacing old ones each day. In other words, when the debt instruments in a fund’s portfolio mature overnight, your fund manager will replace them with fresh overnight securities. The AUM (Assets Under Management) will rise slightly because of the interest payment from these securities.
Benefits of Overnight Mutual Funds
Overnight funds can be a suitable option for certain investors as they provide the following benefits:
1. Low Expense Ratio
Overnight funds come with a low expense ratio that is usually lower than 1%. Accordingly, these mutual fund schemes are suitable for investors who are seeking low-cost investment options.
2. Safe Investment Option
If you are not keen to take risks, then overnight funds might be an option worth considering for you. These funds come with minimal credit risk and zero interest rate risk. The fund value increases due to interest income and remains unaffected by market volatility.
Moreover, with securities maturing in a day, there are no possibilities of default in interest payment.
3. Flexible Holding Period
With an overnight fund, you can hold your investment as long as you feel necessary. You can enter or exit the fund easily while earning market-linked returns. However, in case overnight funds do not align with your investment objective, you can opt for other debt funds offered by Navi. You can choose the Navi Ultra Short Term Fund or the Navi Liquid Fund to fulfil your financial goals. These funds come with a negligible expense ratio and a completely paperless investment process. Visit Navi Mutual Fund and start investing with an amount as low as Rs. 500.
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Purpose of Overnight Funds
Overnight funds are one of the safest debt funds. They carry minimum credit risk and almost zero interest rate risk. These funds offer flexibility, safety and liquidity of withdrawal. They have the potential of better returns if compared to bank savings deposits as there are also tax benefits involved as it is a debt fund.
The purpose of overnight funds is to provide investors the ability to utilise their cash reserves in a much better and profitable manner. Mentioned below are features that make the purpose of the fund more feasible:
- As these have short investment horizon and matures in a single day, it lets investors utilise surplus cash in their hand in a better way
- High liquidity helps investors access their funds efficiently and in almost no time
- Overnight funds are comparatively low risk as they have a very short maturity span. As it matures in just a day the chances of being prone to risk in almost nil
Top 9 Overnight Funds to Invest
| Name of the Scheme | 3 Years Return |
| DPS Overnight Fund- Direct Plan-Growth | 4.01% |
| Nippon India Overnight Fund – Direct Plan-Growth | 3.96% |
| L&T Overnight Fund – Direct Plan-Growth | 3.95% |
| Aditya Birla Sun Life Overnight Fund – Direct Plan-Growth | 3.95% |
| IDFC Overnight Fund – Direct Plan-Growth | 3.93% |
| ICICI Prudential Overnight Fund – Direct Plan-Growth | 3.92% |
| SBI Overnight Fund – Direct Plan-Growth | 3.92% |
| Kotak Overnight Fund – Direct Plan-Growth | 3.92% |
| HDFC Overnight Fund – Direct Plan-Growth | 3.90% |
*Returns as of February 27, 2022
Who Should Invest in Overnight Funds?
Overnight funds are usually suitable for entrepreneurs and businessmen who always need to keep large sums of money for a short while before deploying it elsewhere. Here are the categories of investors who must invest in overnight funds:
1. Risk averse investors
Investors who prefer protecting themselves from stock market volatility can take the help of overnight funds. These are basically the first time investors who can then shift to equity funds from these accounts. Investors who slowly and systematically buy stocks are ones who might avoid the risk of making a big purchase at once and ensuring the safety of their corpus.
2. Short term investors
These funds are suitable for those investors who plan to keep their money for a week or even less. Overnight funds provide the facility to redeem their money in just a day. This flexibility works as a great advantage over liquid funds that charge an exit load within a week.
Taxation on Overnight Funds
Overnight funds are subjected to taxation in a manner similar to debt funds. If units of overnight funds are held for less than 3 years then they are subject to short-term capital gains tax. While holding them for more than three years will subject them to long-term capital gains tax at the rate of 20%.
Investors will be taxed according to their tax slab. They can reap the benefits of indexation. Investors are taxed as per their tax slab on their dividend earnings.
Factors to Remember While Investing in Mutual Funds
To maximise your returns from mutual fund investments, make sure to keep the following factors in mind:
1. Risk Appetite
Every mutual fund scheme comes with a certain risk. The risk-bearing capacity of investors will vary from one individual to another. Some might be able to take more risk, while others might seek low-risk investment options. You need to assess your risk profile and select schemes accordingly.
2. Investment Objective
You need to figure out the different financial goals that you want to fulfil through mutual fund investments. This can include foreign education or marriage of children, purchasing a property, developing a corpus to support post-retirement life and more. Buying mutual funds that align with your investment objectives will help you in your financial planning significantly.
3. Expense Ratio
The expense ratio is the charge that an AMC levies on you for covering its operating expenses, which include fees for fund management, administration, distribution, etc. A higher expense ratio implies lower returns from your investment and vice versa.
4. Mode of investment
The mode of investment is another crucial factor to consider before investing in a mutual fund. You can either choose to invest via the lump sum mode or opt for the Systematic Investment Plan (SIP) route. With a systematic investment plan, you will invest a specific amount at regular intervals (monthly, quarterly, semi-annually, etc.). SIP provides the advantages of rupee cost averaging.
5. Track record of the fund manager
Fund managers are actively involved in managing a scheme. So, the experience and track record of a fund manager is vital for a fund’s performance.
6. Past performance
One of the best ways to determine if you should put your money in a scheme is to check its past performance. Please note that past performance will not guarantee future performance.
Final Word
Overnight funds are ideal investment options for people who want to invest their idle money reserve for a very short period. Make sure to find the best overnight funds that suit your investment objectives. Consider the past performance of the fund and the track record of your fund manager to maximise the chances of better returns.
FAQs
Ans: The taxation on overnight funds is similar to that of debt funds. Income received from an overnight fund in the form of LTCG will be taxed at 20% with an additional cess of 4%. On the other hand, STCG will be taxed as per the tax slab rate applicable for the investor.
Ans: Overnight funds are one of the safest mutual fund schemes. As the underlying securities will mature every day, the associated risk is very low. There is negligible credit risk and no interest rate risk.
Ans: Overnight funds are safer investment options than liquid funds. That said, overnight funds generate lower returns. Choosing between overnight funds and liquid funds will depend on your expected returns, investment objective, risk appetite and other factors.
Ans: There is no particular minimum investment amount for overnight mutual funds. This will vary from one fund house to another. Make sure to compare such aspects across various fund houses before you invest in an overnight fund.
Ans: Overnight funds were launched in 2018 due to SEBI’s reclassification task of mutual funds. As per the recent SEBI circular, overnight funds would not invest in any debt security that comes with credit enhancements and/or structured obligations.
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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.
