How does overnight fund work?

how overnight fund works
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Mutual funds are a popular investment instrument because they offer a wide range of options to suit the needs of different investors. One such flexible type of mutual fund is the overnight fund. Let’s take a closer look at what an overnight fund is, how it works, and whether it is a good investment option.

  • Table of contents
  1. What is an overnight fund?
  2. How overnight fund works?
  3. Key features of overnight funds
  4. Who should invest in overnight funds?
  5. Factors to consider before selecting an overnight fund
  6. Are overnight funds a safe investment?/a>
  7. Bajaj Finserv AMC
  8. FAQ

What is an overnight fund?

An overnight fund is a type of debt mutual fund that invests in securities with a maturity period of just one day. Simply put, these funds buy securities ‘today’ and sell them ‘tomorrow’, hence the name ‘overnight’. The purpose of an overnight fund is to provide a relatively stable option for investors to park their surplus funds, usually for a short duration, with an expectation of earning potentially reasonable returns.

How overnight fund works?

Let's assume you have a sum of Rs. 1 lakh that you want to keep aside for a very short duration. In this scenario, a suitable investment option for you could be an overnight fund. When you invest the amount in an overnight fund, the fund manager uses the money to purchase securities that mature the very next day. The following day, the fund manager sells those securities and buys new ones. This cycle continues until you decide to withdraw your investment.
During this period, the fund may generate returns, which will be added to the fund's NAV (Net Asset Value). Once you redeem, you get your investment back along with the returns that may have been generated during the investment period.

Key features of overnight funds

The following are some key features of an overnight fund:

  • Short-term investment: Overnight funds are most suited for extremely short-term investments, even as short as a single day.
  • Less impact of capital: These funds are among the least risky mutual fund investments, as they invest in securities with a single-day maturity, making them relatively less susceptible to market volatility.
  • Liquidity: Overnight funds offer high liquidity. Investors can redeem their units on any business day.
  • Returns: While the returns on an overnight fund are not usually as high as those from equity or long-term debt funds, these funds can offer relatively steady and modest returns.

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.

Factors to consider before selecting an overnight fund

Before investing in an overnight fund, investors should evaluate certain factors:
Objectives and risk appetite: Ensure that your financial objectives and risk tolerance are in line with those of the chosen overnight fund.
Fund performance: Although all overnight funds invest in similar securities, there can still be slight differences in returns. Evaluate past performance but remember that it is not an indicator of future returns. Past performance may or may not be sustained in the future.
Expense ratio: A lower expense ratio can result in potentially higher net returns.

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.

Bajaj Finserv AMC

If you’re looking to invest in an overnight fund, you can explore the recently launched Bajaj Finserv Overnight Fund by Bajaj Finserv AMC. This fund is an open-ended debt scheme investing in overnight securities with a relatively low interest rate risk and a relatively low credit risk.
This product is suitable for investors who seek a potentially regular income over a short-term period that may be in line with the overnight call rates. Moreover, Bajaj Finserv AMC has also launched liquid fund, money market fund, and flexi cap fund. However, as with any investment decision, it is recommended that you consult a financial advisor to understand how these products work and whether they align with your financial goals and risk tolerance.


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 are the advantages of overnight funds?

Some advantages of overnight funds are:
Relatively stable debt fund: With low interest rates and credit risk, these funds concentrate on overnight securities, seeking to offer consistent returns.
Flexible holding period: Investors can enter and exit easily, receiving market-linked returns for the term of their investment.

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.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.