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Overnight mutual funds- What are they and how do they work?

  • Akshatha Sajumon
  • Jan 12 2022
  • 7 minutes
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Equity markets around the world are known to have taken a hit since the onset of the Covid-19 pandemic. This has raised many concerns among investors and many have started exploring alternative investment avenues such as overnight funds. Additionally, the poor performance of liquid funds has led to a shift from debt-based investment options to overnight Mutual Funds. The primary reason is the fund’s investor-friendly features and many benefits on offer.

Here, we will demystify the concept of overnight mutual funds for new investors and explore surrounding features, benefits, and taxation.

What are overnight mutual funds?

Overnight funds is a new category of debt funds introduced under SEBI’s mutual fund blanket after a reclassification exercise in 2018. SEBI defines overnight funds as open-ended debt schemes that primarily invest in overnight securities with an investment horizon of one day. People can redeem the cash deposited the next day itself, or they can buy more overnight funds. Thus, people can keep reinvesting in overnight funds.

During trading hours, investors who wish to invest their money in such schemes can put across a purchase and redemption request after choosing an overnight fund.

How do overnight funds work?

The overnight mutual funds are invested in CBLOs (Collateralized Borrowing and Lending Obligation), overnight reverse repos, debt, or other money market funds with a maturity period of one day. These funds are always regulated by SEBI. According to the SEBI norms, these funds are restricted to invest in any money market instruments with a maturity period not more than a day. This restriction results in low default risk for the investor in their portfolio. This is because it is unlikely for security maturing overnight to default on its interest payment. 

Overnight funds can earn only through interest payments on the debts. It happens as the overnight fund managers invest in overnight securities with the maturity of one day. When the securities get matured, the fund managers use that fund to invest in more overnight securities. Hence, it results in no capital gain.

Benefits of investing in Overnight Funds

Some benefits offered by overnight funds are as below:

  • Utilisation of Idle Funds

This scheme is ideal for people who hold extra funds and are looking for a way to invest them. New investors often want to stay away from high-risk investments and earn predictable or higher profits. Unlike plain investment options with a bank, this scheme has the lowest tenure and comparatively higher returns. The investment aim is to help people gain more in a short period.

  • Flexibility in investment

With overnight funds, an investor can invest in and pull out their money anytime they want to. An individual can keep on reinvesting every day or pull out the cash after their first investment. For those who like to reinvest, there are higher chances of gaining profits for the duration of the investment.

  • Safest fund with low risk

The value of an overnight fund doesn’t change rapidly, but only increases over time. When compared with liquid funds, overnight is the safer option. With the poor performance of liquid funds, there has been a significant shift in investment towards overnight mutual funds. 

Top-performing Overnight fund recommendations

Some of the top-performing fund recommendations under this fund category are:

SBI Overnight Fund

About the Fund

The scheme is designed to offer investors an opportunity to invest in overnight securities with maturity on the next business day. It is best suited for investors who want to invest for a very short duration and seek alternatives to invest in bank deposits.

Inception DateJanuary 01, 2013
Benchmark NameCRISIL Overnight Index
Fund ManagerR Arun
Expense ratio0.10%
Fund typeOpen-ended
RiskLow

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
3.18%3.28%4.08%4.87%6.34%

HDFC Overnight Fund

About the Fund

The scheme aims to generate returns through investment focus in debt and money market instruments that have overnight maturity. It is suited for investors who want to invest for a very short duration and are looking for better alternatives to bank deposits.

Inception DateJanuary 01, 2013
Benchmark NameCRISIL Overnight Index
Fund ManagerAnil Bamboli
Expense ratio0.10%
Fund typeOpen-ended
RiskLow

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
3.17%3.26%4.06%4.85%6.06%

Aditya BSL Overnight Fund

About the Fund

The scheme’s objective is to generate reasonable returns from investment focus in debt securities, money market instruments & CBLO/Tri-party Repo that have maturities of 1 day. The scheme focuses on high-quality debt and money market instruments for investment. 

Inception DateNovember 01, 2018
Benchmark NameCRISIL Overnight Index
Fund ManagerKaustubh Gupta
Expense ratio0.10%
Fund typeOpen-ended
RiskLow

Historical Returns of the Fund (annualised)

1-Year2-Year3-YearSince Inception
3.22%3.31%4.11%4.23%

ICICI Prudential Overnight Fund

About the Fund

The scheme aims to provide reasonable returns in line with an objective to maintain low risk and a high level of liquidity. It primarily invests in overnight securities that have maturities of 1 business day. 

Inception DateNovember 15, 2018
Benchmark NameCRISIL Overnight Index
Fund ManagerNikhil KabraRahul GoswamiRohan Maru
Expense ratio0.10%
Fund typeOpen-ended
RiskLow

Historical Returns of the Fund (annualised)

1-Year2-Year3-YearSince Inception
3.18%3.27%4.08%4.17%

Application of taxation on overnight funds

The application of the tax on this fund is like debt mutual funds. The tax rate depends on the period for which an investor holds the fund. There are two major taxations on overnight funds:

  • Tax on Short-Term Capital Gains: 

If an investor remains invested in an overnight fund for a period of up to 3 years, capital gains fall under the short-term capital gains bucket. These are taxed at the income tax slab rate applicable to the investor.

  • Tax on Long-Term Capital Gains: 

If an investor sells the overnight fund units after holding them for over 3 years, the gains are considered as long-term capital gains. The investor can then benefit from “indexation.” This means the purchase price is increased due to adjustment for inflation (as per the index provided by the Government) before the capital gain is calculated. Thus, the total taxable amount is reduced because of indexation. Long-term capital gains are taxed at 20% as per current income tax rules.

Who should invest in overnight funds?

Here are the type of investors who can invest in overnight funds:

  • Investors with short-term goals: Overnight funds are ideal for investors whose investment horizon is below one week. This is because the funds allow investors to redeem the units after holding them for as little time as one day. This flexibility is a benefit offered by overnight funds and not liquid funds, which charge an exit load for redemptions made within seven days.
  • Those who want easy routing of investments to equity funds: Investors who want to avoid the risks related to long-term equity investments can invest in an overnight fund. From these funds, investors can route investments gradually and systematically to an equity fund. Equity investments made gradually and over time can ensure that an investor does not get exposed to risks of bulk equity investment.

Conclusion

Individual investors and entrepreneurs can make the most out of overnight fund investments. These have a low expense ratio, allow investors to make a small investment, and are highly liquid.


Frequently Asked Questions

What are overnight mutual funds?
Overnight mutual funds are open-ended debt schemes that mainly invest in overnight securities with a maturity of one day. These have a short investment horizon and are therefore ideal for investors looking to invest money for a day and want better returns than bank specific investments.

Are overnight funds safe?
Overnight funds are good investment options for those who have a very short investment horizon. These mutual funds are considered safe since they are not exposed to high-risk assets or securities. 

How do I invest in mutual funds overnight?
For investing in overnight mutual funds, investors can reach out to the AMC by visiting the office or through their online portal. Alternatively, these investments can also be made through a broker.

How do I redeem my overnight fund?
Redemption of overnight funds is easy as it can be done online through the Demat account or by reaching out to the AMC.

Which overnight fund is best?
Some of the top-performing overnight mutual funds are:

  • SBI Overnight Fund
  • HDFC Overnight Fund
  • UTI Overnight Fund
  • L&T Cash Fund

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