Overnight Funds: Understanding The Relationship Between Duration and Yield

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Overnight funds can be a suitable investment choice for investors seeking to park their money for very short periods. These funds invest in securities that mature the very next day, making them a relatively low-risk investment option. However, understanding the relationship between two key concepts – duration and yield – is important for investors looking to make the most out of their overnight fund investments. 

Let’s take a closer look at the concepts of duration and yield and explore their relationship, especially in the context of the impact of interest rates on overnight funds.

  • Table of contents
  1. What is duration in overnight funds?
  2. What is yield in overnight funds?
  3. Relationship between duration and yield in overnight funds
  4. Effects of interest rates in overnight funds
  5. Bajaj Finserv Overnight Fund
  6. FAQs

What is duration in overnight funds?

Duration in fixed-income investments measures the sensitivity of a bond's price to changes in interest rates. It represents the weighted average time until a bond's cash flows are received, considering both coupon payments and the bond's maturity. Higher duration implies higher interest rate risk, as the bond's price is more sensitive to rate changes. This is because the rates of bonds or fixed-income securities are inversely proportional to prevailing interest rates. 

For overnight funds, the duration is very low day because the investments made by these funds mature in just a day. This lowers the interest rate risk of such funds, making them relatively stable.  

What is yield in overnight funds?

Yield in overnight funds is the income returned on an investment over a particular period. For overnight funds, the yield is often determined by the interest rates offered on the securities that they invest in, which are typically very short-term. The yield can vary from day to day, reflecting the changing conditions of the money market in which these funds operate.

Relationship between duration and yield in overnight funds

The relationship between duration and yield in overnight funds is less pronounced than in other types of funds due to the very short duration of these investments. Generally, a longer duration implies a higher sensitivity to interest rate changes. However, since overnight funds invest in securities with a maturity of just one day, their duration is minimal, and the yield is typically low, based on the current overnight interest rates.

Effects of interest rates in overnight funds

Interest rates can still play some role in the performance of overnight funds. Since these funds invest in securities maturing in a day, any changes in the overnight interest rates can affect the yield of these funds. When interest rates rise, the yields on newly issued short-term debt securities increase. As a result, the yields on existing securities held by overnight funds may also rise, leading to an increase in the fund's overall yield.  

On the other hand, when interest rates fall, the yields on overnight funds tend to decrease.  

However, due to their short duration, overnight funds are less exposed to the risks associated with long-term interest rate fluctuations. 

Overnight funds offer a unique investment option with a very short duration and yields. While the interest rate risk on these funds is low because of their short maturity, understanding how interest rates affect their performance is crucial for investors. Overnight funds can be suitable for investors looking for relatively low-risk, short-term investment opportunities, particularly in an environment where interest rates are favourable.

Bajaj Finserv Overnight Fund

The Bajaj Finserv Overnight Fund is an open-ended debt scheme that invests primarily in overnight securities with a maturity of one business day. It can be suitable for investors seeking high liquidity and modest return potential over the very short term or for parking surplus funds or idle cash. You can read detailed scheme information here.


How does yield work in overnight funds?
Yield in overnight funds is the income earned on the investment, expressed as a percentage. It can vary frequently, reflecting the interest rates of the securities the funds invest in, which mature in one day.

How do interest rates affect overnight funds?
Interest rate risk is low in such funds, but a change in overnight interest rates can have some impact on the yield of overnight funds. When interest rates rise, the yield on these funds tends to increase, offering higher potential returns to investors. On the other hand, a fall in interest rates usually results in lower yields for overnight fund investments.

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 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.