Overnight Funds: What They Are and How They Benefit You

An overnight fund is a type of debt mutual fund that invests in securities that mature in a single business day. In simple terms, an overnight fund is a mutual fund that invests in overnight securities. These securities have a maturity period of just one business day, making them distinct from other types of mutual funds.

The core purpose of an overnight mutual fund is to offer potentially reasonable returns that are in line with its relatively low-risk profile and high liquidity. The pooled money from an overnight fund is primarily channeled toward overnight securities. This makes these plans a preferred choice for institutions that want to park surplus funds for just one day or for investors with spare cash aiming for returns that are marginally superior to those of their current account.

Understanding the features of an overnight fund is instrumental for investors with specific short-term financial goals. Its blend of benefits, especially in terms of low risk and high liquidity, makes it an attractive option for both institutional entities and individual investors with idle cash resources.

What are overnight funds?

Debt funds that invest in securities that mature the next business day are known as overnight funds. These open-ended debt funds do not have a lock-in period and invest in securities like tri-party repo (TREPS), overnight reverse repos, and other money market securities with a maturity period of a single day. Investments in the scheme are generally of 1 day maturity, hence the name ‘overnight funds’.

How do overnight fund investments work?

Since overnight funds invest in debt securities and assets that mature in one business day, the fund manager uses the proceeds of one day to buy a fresh set of debt securities for the next day. When the next set of securities matures, the fund manager uses the proceeds to buy overnight securities for the very next business day. And thus, the cycle continues. So, how does the fund earn returns? Simple – it earns through interest payments on its debt holdings or 1 day interest on securities held. Also, the portfolio of overnight funds never stays the same as the underlying securities keep maturing the next day.

Features of overnight funds

• High liquidity: If you want to invest your idle cash for a short term before making up your mind for a bigger investment, the high liquidity associated with overnight funds can make them ideal for you.
• Low risk: Since overnight funds mature the next business day, they fall in the low-risk investment category. However, the short investment horizon also affects the returns you get from overnight funds. So, they are essentially low risk, low return funds.
• No exit load: Most fund houses do not charge exit load for overnight funds. However, you must always check the scheme information documents to know the details. Resistant to market volatility: While no market investment can be completely risk-free, the short holding period of overnight funds makes them resistant to interest rate changes, credit risk, etc.
• Taxation: Since overnight funds fall in the debt funds category and mature the next business day, the capital gains are added to the net income of the investor and taxed according to the applicable income tax slab rate.

Benefits of investing in overnight mutual funds

Relatively stable and potentially better returns: Ab clear advantage of an overnight mutual fund is its capability to provide potentially stable returns. While modest, the return potential is often marginally better than what a regular savings account might yield. However, the risk associated with overnight funds is comparatively higher than savings accounts Investors can use a compound interest calculator to compare the return potential of the two avenues.

Suitable for short-term goals: One of the benefits of overnight mutual funds as an investment avenue is in the case of short-term objectives. Be it for parking extra cash or for addressing immediate monetary needs, the structure of overnight funds is tailored to cater such goals efficiently.

Liquidity: Overnight funds make their investments in securities that mature within a day, which is why the liquidity factor of these funds is very high. This ensures that if the investor has a sudden requirement for funds, these can be liquidated quickly and easily.

Easy access to funds: In today’s digital age, ease of transactions is an important factor for investors to consider. Investors can park their money in overnight funds via both online and offline modes. Additionally, redeeming these investments is a straightforward and hassle-free process. With the Insta redemption facility, investors can redeem Rs. 50,000 or 90% of the invested amount, whichever is lesser, instantly.

Relatively low risk: The securities in which an overnight fund invests mature within a day. This reduces the interest rate risk associated with them. Overnight funds, with their relatively low-risk profile, may appeal to conservative investors. To estimate how regular investments could grow, a SIP calculator can be a helpful tool for planning.

Role of changing interest rate on overnight funds

Several factors can change the repo rate and, by extension, change the interest rate on overnight funds. These include:

• Monetary policy: The central bank may raise or lower the repo rate to control inflation and economic growth.
• Controlling inflation: To combat inflation, the central bank can raise the repo rate. This discourages borrowing and spending, ultimately slowing down economic activity and dampening inflation.
• Stimulating growth: Conversely, during an economic slowdown, the central bank can lower the repo rate. This promotes borrowing and spending, aiming to reignite economic growth.
• Supply and demand: The supply and demand for short-term funds can also affect the repo rate.
• High demand: When the demand for short-term funds from banks and businesses is high, it impacts the rate of newly issues security of 1 day, this affecting overnight fund interest rates.
• Abundant supply: Conversely, when there's an abundance of short-term funds available, the repo rate often declines. This leads to lower overnight fund interest rates, reflecting the reduced demand for borrowed funds.
• Global economic conditions: International economic conditions can also influence overnight fund interest rates:
• Recession: If a global recession looms, central banks around the world might coordinate efforts to stimulate their economies. This can involve lowering repo rates, impacting overnight fund interest rates globally.
• Global boom: On the other hand, a period of global economic prosperity might prompt central banks to raise repo rates to prevent excessive inflation.

Risk and reward for investing in overnight fund

Investing in overnight funds comes with its own set of risks and rewards. While these funds are relatively low risk and highly liquid, they are not entirely risk-free.

Risks associated with overnight funds

The main risk associated with overnight funds is interest rate risk. Changes in interest rates can impact the return potential of these funds though to a relatively smaller extent. In a rising interest rate environment, the return potential of existing overnight funds may decrease, whereas in a falling interest rate scenario, the return potential may increase marginally.

However, overnight funds are considered relatively stable compared to other debt funds due to their very short investment horizon and focus on high-quality, short-term instruments. Additionally, there is minimal risk of default since the securities mature the very next day.

Reward potential of overnight funds

Overnight funds can be suitable for parking surplus cash for a very short period as they are associated with a relatively low investment risk. The primary objective of overnight funds aligns with investors who prioritise mitigating impact on capital with the potential for modest returns in the short term.

Therefore, overnight funds are usually considered by large institutions for temporarily parking large amounts of cash. However, small investors and ultra-conservative investors can also use these funds as a relatively stable investment avenue for a short period of time.

Purpose of overnight funds

Overnight funds offer investors the opportunity to invest their surplus cash instead of leaving it in a savings account. The short investment horizon makes it a relatively low-risk investment since overnight funds mature in just one day. And the good part is that these funds are highly liquid investment securities and can be redeemed quickly.

What to consider before investing in overnight funds?

Most people who understand ‘what is overnight mutual fund’, are interested in investing their money in them. However, here are some factors investors must consider first:

• Low returns: By now you know what is an overnight fund and the fact that it matures the next day. This makes it a relatively low-risk investment. However, this also means that it offers low returns. Thus, your investment in overnight funds must align with your financial goals.
• High liquidity: While it’s good to opt for an investment that can be redeemed quickly, some investors may find it difficult to keep their investments intact in times of uncertainty. They may take decisions based on their emotions instead of evaluating their investment plans.
• No entry and exit load: Unlike liquid funds and other types of debt funds, there is no entry or exit load on overnight funds. They can be a suitable option for low-risk investments in the short term for most investors.
• Immune to market volatility: The extremely short-term horizon of overnight funds makes them relatively immune to factors that usually affect the market including RBI interest rate changes, credit risk, etc.

How are overnight funds taxed?

Overnight funds are taxed as debt mutual funds. Here’s the detailed information on debt funds taxation.

If you have never invested in overnight funds or mutual funds, you can get started with as little as Rs.1,000. Since the investment in an overnight mutual fund is essentially for only one business day, the risk associated with the investment is negligible. Slowly, you will gain the confidence to invest any surplus cash into overnight funds to earn considerably more than parking it in a bank account. In short, an overnight fund is like a piggy bank where you can park your money for a short duration and earn reasonable return while keeping your money easily accessible.

You can consider investing in Bajaj Finserv Overnight Fund. Easy access to funds, suitability for short-term goals, relatively stable returns, high liquidity, and comparatively low risk are some of the benefits of investing in Bajaj Finserv Overnight Funds.

Who should invest in overnight funds?

Investors looking for a place to park their surplus funds for a very short duration can consider investing in overnight funds. This includes corporates, institutions, and individuals with large amounts of cash that they wish to deploy productively for brief periods. Investors who are looking for a relatively low-risk, highly liquid investment avenue can also consider overnight funds.

Are overnight funds a safe investment?

The term ‘overnight fund’ could sound risky to some people. However, overnight funds, due to their nature of investment in securities maturing in one day, carry minimal market risk. These funds are almost immune to interest rate volatility, making them a relatively stable choice compared to other debt funds. However, it’s important to remember that, like all investments, overnight funds are not entirely risk-free. They carry a small amount of credit risk, i.e., the risk of the issuer defaulting on payment. To sum it up, an overnight fund can be a relatively stable investment tool for those seeking a low-risk, short-term parking place for surplus funds. Their less volatility, combined with liquidity and reasonably steady returns, make overnight funds an attractive option.

When to invest in an overnight fund?

If you are interested in investing in overnight funds, you may be wondering: “When is the right time to invest in an overnight fund? The answer is simple – you can invest in an overnight fund as soon as you think you are ready. While you may have to look at market conditions for investing in an equity fund or any other long-term investment, you can start investing in an overnight fund at any time. Since the underlying securities mature the very next day, your investment is never at a high default risk, interest rate risk or credit risk. On top of that, overnight funds do not have a lock-in period, so you are free to redeem your investment at any time.

FAQs

What are overnight funds, and how do they work?

Overnight funds are debt mutual funds that invest in ultra-short-term instruments with a maturity of one day. They offer low risk and high liquidity as they invest in securities with very short tenures.

What type of investors can opt for overnight funds?

Investors with surplus funds looking for a relatively stable and liquid investment option with nominal interest rate risk can consider overnight funds. These funds are particularly suitable for short-term parking of funds.

Are the returns from overnight funds guaranteed?

No, the returns from overnight funds are not guaranteed. While they are considered low-risk due to their short-term nature and investments in highly liquid instruments, the returns fluctuate based on prevailing market conditions and interest rates.

What are overnight funds, and how do they work?

Overnight funds are debt mutual funds that invest in ultra-short-term instruments with a maturity of one day. They offer low risk and high liquidity as they invest in securities with very short tenures.

What are the advantages of overnight funds?

Some of the key advantages of overnight funds are:

Stability and low volatility: One of the key advantages of investing in overnight funds is their relative stability and lower volatility. These funds primarily invest in high-quality, short-term instruments, which minimizes the risk of default.

Perfect for short-term goals: If you have short-term financial objectives that require liquidity and low risk to your invested capital, overnight funds can be a suitable option. Whether for an emergency fund, upcoming costs, or planned expenditures, overnight funds offer a relatively stable place to temporarily park your money.

Diversification and expert management: Investing in overnight funds gives investors access to a diversified portfolio of short-term instruments, all professionally managed by experienced fund managers. This diversification helps reduce risk and may improve the fund's overall performance.

Suitable for corporates and institutions: Overnight funds are not just for retail investors; they are also widely used by corporations and institutions. Many businesses have surplus funds that they need to park for a short time, and overnight funds effectively meet this need.

Are overnight funds a stable investment avenue?

Overnight funds are relatively stable compared to other debt funds due to the very short maturity period of the underlying debt securities. However, like all investments, they are not entirely risk-free and are subject a minimal amount of interest rate risk and default risk.

What is the interest rate of overnight funds?

The interest rate of the instruments held in overnight funds can vary based on the scheme and factors such as central bank monetary policies, economic indicators, inflationary pressures, and market liquidity conditions.

How do overnight funds generate returns?

Overnight funds generate returns by investing in securities that mature the next day, adding the returns to the fund's Net Asset Value (NAV).

What is the minimum investment required for overnight funds?

The minimum investment requirement for overnight funds is generally low, making them accessible to a wide range of investors. For example, the minimum investment amount for the Bajaj Finserv Overnight Fund is Rs. 100.

Can I redeem my investment in overnight funds at any time?

Yes, one of the key advantages of overnight funds is their high liquidity, allowing investors to redeem their investment on any business day.

What does overnight funds seek to provide?

Overnight funds aim to help investors make better use of their cash reserves by offering short investment tenures, high liquidity, and minimal risk. These characteristics optimize surplus money and promote efficient and timely redemptions

What should I consider before investing in overnight funds?

Before investing in overnight funds, you should consider the returns, strategic fit, and long-term goals. While overnight funds provide liquidity like savings accounts, the returns may be lower than other investments. It's important to align overnight fund investments with your overall financial goals and strategy, prioritize less impact on capital and liquidity for idle funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.