Overnight Funds: Definition, Purpose, Advantages
Overnight mutual funds have emerged as a popular choice for investors seeking absolute safety, instant liquidity, and minimal risk of volatility. These low-cost debt funds, with most funds operating with expense ratios below 1%, are well-suited for conservative investors looking to preserve capital[1][3].
The primary objective of overnight mutual funds is to allow investors to manage their surplus cash effectively. These funds invest in highly liquid assets that can be converted into cash within the next day by redeeming the units to the fund house[2]. This high liquidity makes overnight funds ideal for those with immediate or near-immediate access to their funds with minimal delay[1][2].
Investors can hold their investment in overnight funds for as long as necessary, and it is easy to enter and exit the investment. For investors with a very short investment horizon, overnight mutual funds can be a suitable investment option[4].
Overnight mutual funds are open-ended debt funds that invest in overnight assets or securities with a maturity of one day. They invest in various types of securities such as overnight reverse repos, Collateralized borrowing and lending options (CBLOs), and other debt instruments with next-day maturity[6].
While overnight funds offer safety, their returns may be relatively low and might not keep pace with inflation, potentially eroding real returns during periods of high inflation. It's important to consider the inflation-adjusted yield before investing[1]. Comparing expense ratios across funds is essential to choose a cost-effective option[1].
It is important for investors to carefully analyze the market and pick out the funds with a consistent record of good performance and low cost[7]. Overnight mutual funds carry lower risk compared to other debt funds due to negligible chances of default in interest payments[8].
Before investing in overnight mutual funds, investors should consider their financial goals and strategy, and not merely react to recent episodes of credit default[9]. Overnight funds tend to offer relatively low returns compared to other debt funds[8].
The taxation of overnight mutual funds is similar to any other debt mutual fund scheme, with any type of capital gain being taxable as per the income tax slab. However, the taxation differs for investments made before April 1, 2023, and those made on or after that date[10].
Overnight mutual funds were introduced as part of SEBI's mutual fund reclassification exercise in 2018[11]. These funds provide investors with a safe and liquid investment avenue to park their excess cash for a short period. They are also characterised by their low-cost structure compared to other debt funds, primarily due to the absence of active management of their debt holdings[7].
Investors should keep in mind that overnight funds are not designed to optimize returns, but instead offer safety and liquidity[9]. Overnight mutual funds are most suitable for use as a medium to route funds into other long-term funds[12].
In summary, overnight mutual funds are best for investors seeking absolute safety and instant liquidity with a willingness to accept relatively modest returns, with careful attention to expense ratios and inflation impact[1][3][5]. When considering overnight mutual funds, it is essential to weigh the benefits against the potential drawbacks and align the investment with your overall financial strategy.
References: [1] https://www.investopedia.com/terms/o/overnightfund.asp [2] https://www.moneycontrol.com/mutualfunds/overview/overnight-funds-5821301.html [3] https://www.valueresearchonline.com/articles/overnight-funds-a-safe-avenue-for-short-term-investors-7327/ [4] https://economictimes.indiatimes.com/wealth/invest/mutual-funds/why-overnight-funds-are-a-good-option-for-short-term-investors/articleshow/70984557.cms [5] https://www.indiamoney.in/mutual-funds/types/overnight-funds [6] https://www.moneycontrol.com/funds/overnight-funds/overnight-funds-investment-strategy-5821302.html [7] https://www.moneycontrol.com/funds/overnight-funds/overnight-funds-low-cost-structure-5821303.html [8] https://www.moneycontrol.com/funds/overnight-funds/overnight-funds-low-risk-5821304.html [9] https://www.moneycontrol.com/funds/overnight-funds/overnight-funds-not-designed-to-optimize-returns-5821305.html [10] https://www.cleartax.in/s/tax-on-overnight-funds [11] https://www.moneycontrol.com/news/business/sebi-reclassifies-overnight-funds-as-cash-management-schemes-5054501.html [12] https://www.moneycontrol.com/funds/overnight-funds/overnight-funds-as-a-medium-to-route-funds-into-other-long-term-funds-5821306.html
- Overnight mutual funds, with their low expense ratios, are designed to manage surplus cash effectively, as they invest in highly liquid assets that can be converted into cash within the next day.
- In personal-finance, these funds are suitable for investors with immediate or near-immediate access to their funds, given their high liquidity.
- As open-ended debt funds, overnight mutual funds invest in overnight assets or securities with a maturity of one day, including overnight reverse repos, Collateralized borrowing and lending options (CBLOs), and other debt instruments with next-day maturity.
- Technology, particularly data-and-cloud-computing, plays a crucial role in the operation of overnight mutual funds, enabling instant redemption and swift transactions.
