Risks and relative stability measures associated with overnight funds
Overnight funds have gained substantial traction in the Indian financial ecosystem. As the name suggests, an overnight fund is a type of debt mutual fund that offers high liquidity and earns income on surplus funds invested for a very short term, typically a single business day. Thus, many investors park their money in overnight funds with the aim of a reasonable return on the very next business day. This is made possible as these funds invest mostly in overnight securities that have a maturity period of one day.
However, like with any other investment avenue, investing in an overnight fund is associated with certain risks. In this article, we will take a closer look at the risks and other measures associated with overnight funds.
Table of contents
- What are the risks associated with overnight funds?
- Overnight funds: A relatively stable option among mutual funds
- Things to consider when making an investment in overnight funds
- Bajaj Finserv Overnight Fund
- FAQs
What are the risks associated with overnight funds?
Overnight funds are amongst relatively stable mutual funds in the market. However, no mutual fund investment is completely free from risks, so it’s important to keep in mind the following risks of overnight funds.
Default risk: One might assume that an investment horizon of just one day would mitigate most risks. However, an overnight fund isn’t completely free from default risks. Default risk arises when the counterparty – often a bank or financial institution – fails to fulfil its payment obligation the next day. The good news is that the default risk in overnight funds is considerably lower compared to other short-term and long-term debt funds. Given the brief maturity period, the creditworthiness of the issuer is paramount, and thus overnight fund managers usually invest in high credit-rated securities.
Interest rate risk: Another factor to consider is the interest rate risk. As overnight funds invest in securities maturing in a day, the fluctuation in interest rates directly impacts the Net Asset Value (NAV) of the fund. However, due to the very short investment horizon, the interest rate risk in an overnight fund is minimal compared to other debt funds.
Liquidity risk: Liquidity risk emerges when a fund faces difficulties in selling its assets without causing a significant movement in its price. In the case of overnight funds, the liquidity risk is again minimised. As the securities are held for just one day and are usually in high demand, it’s less likely for a liquidity issue to crop up.
Overnight funds: A relatively stable option among mutual funds
Given the risks detailed above, the following might sound counterintuitive, but overnight funds are among the relatively stable mutual funds to invest in. This is because the risks involved in overnight fund investments are comparatively lower than in other categories of mutual funds. Their one-day maturity means they are less exposed to credit and interest rate volatilities. These funds can be a suitable choice for conservative investors looking for a relatively stable avenue to park their surplus funds temporarily.
Things to consider when making an investment in overnight funds
Investment goals: Before you invest in an overnight fund, it’s important to assess whether it aligns with your financial goals. Overnight funds are better suited for those aiming for low impact on capital and quick potential returns over a short period.
Selecting the right fund and AMC: Once you decide to invest in an overnight fund, you must choose a suitable Asset Management Companies (AMCs) and their offerings. Assess the fund's portfolio, credit quality of its investments, and the reputation of the AMC. While overnight funds are relatively stable, the credibility of the AMC plays a crucial role in ensuring the quality of your investment.
Bajaj Finserv Overnight Fund
If you’re looking to invest in an overnight fund, you can explore the Bajaj Finserv Overnight Fund. This fund is an open-ended debt scheme investing in overnight securities with relatively low interest rate risk and credit risk. This product is suitable for investors who seek regular income over a short term period that may be in line with the overnight call rates.
Conclusion
While risks in overnight fund investments exist, they are comparatively minimal and can be managed with due diligence. For investors who are seeking a short-term parking avenue for surplus funds, an overnight fund might just be a suitable fit. However, thorough research and understanding of your financial goals are key to making informed decisions. Therefore, as with any investment decision, it is recommended that you consult a financial advisor to understand how overnight funds work, and to assess whether they are aligned with your financial goals and risk tolerance.
FAQs
What are overnight funds, and how do they work?
Overnight funds mostly invest in very short-term securities with a maturity of one day. They aim for relative stability.
What risks are associated with investing in overnight funds?
Overnight funds have minimal credit risk but can be affected by changes in overnight interest rates. However, they are generally considered low-risk investments.
What is the typical return expectation from overnight funds?
Overnight funds provide relatively stable returns, closely tracking short-term interest rates. These returns are typically lower than those from other mutual fund categories.
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.