English 
Hindi 
What is an Overnight Fund
Overnight Funds Meaning: Overnight Mutual Funds, as the name suggests, are open-ended Debt Funds which are characterized by low risk and less volatility, and which have a maturity of one day. They park the investors’ money in securities with overnight maturities, such as the reverse repo, collateralized borrowing and lending obligation (CBLO), and other debt assets with a maturity of one day. Thus, they carry minimal credit risk and zero interest rate risk. The primary objective of overnight funds is to enable the investors to make more reliable and profitable investments at the same time, ultimately utilizing their money in a much better way. Overnight funds are a boon for investors who are attracted to the prospect of flexible redemption, which allows investors greater control over their invested capital.
How do Overnight Funds Work
Overnight Funds invest in debt securities with overnight maturity. Their portfolios typically comprise instruments such as reverse repos, CBLO, and other one-day maturity debt assets, and give returns to their investors through interest payments.
The Assets under Management (AUM) at the beginning of the day are held in cash and the fund managers make investments in bonds that mature overnight. The proceeds are further utilized to buy more bonds, which again mature overnight, thus creating a cycle of investment.
The fund managers make very vigilant decisions as to where the investments should be made. It is as a result of such a cautious approach that their portfolio stays immune from the risk of volatility, unlike conventional funds. Also, since Overnight Funds are not dependent upon aftermarket for liquidating investments, the amount on maturity flows directly from the issuer company.
Investors who are willing to invest their money in such Overnight Funds are supposed to forward a purchase and redemption proposal for their choice of Overnight Funds during trading hours.
Since these funds carry low risk because of minimal exposure to interest rate fluctuation or the possibility of default, Overnight Funds are considered to be one of the safest of all the Mutual Funds. For beginners in Mutual Funds investments, Overnight Funds are just the right option to get started. Although the low-risk profile directly implies a low return as well, it also means that the risk of loss will be mitigated. Further, your money wouldn’t be locked in for a long period of time, which is the greatest advantage of overnight funds.
The core stakeholder structure for Overnight Funds as mandated by SEBI, is as follows:
- Investors: who put their money in the fund. Investors can be retail investors, institutional investors, banks, and other institutions.
- Clearing Corporations: Clearing Corporation of India Limited (CCIL) is the intermediary which enables the settlement of gains and losses arising out of securities. In case of Overnight Mutual Funds, CCIL also acts as a connecting entity which connects the lender and borrower and ensures the security and money is delivered timely, in this case on the next business day, without any hindrances.
- Fund Manager: This would be an institution or individual specializing in managing such funds.
- Borrower: A market is never complete if there isn’t a person or institution ready to perform an action opposite to yours. In the case of Overnight Funds, one of the primary borrowers is a bank.
Advantages of Overnight Funds
An Overnight Fund offers its investors the ability to park their spare funds in a highly liquid and safe way. In other words, investing in Overnight Funds comes with a number of advantages.
- Short Investment Tenure: Overnight maturity is the unique selling proposition of the Overnight Mutual Funds. As they mature in just one day, the fund manager has the advantage of being able to utilize the proceeds immediately. Also, the short tenure of these funds allows investors to make better use of the extra cash they have in their hand.
- Low-risk and Volatility: The short investment time and maturity of a day helps in mitigating the risk of such investments by providing protection against interest rate fluctuations and other uncertainties. These funds are most suited to people with low-risk appetite.
- Offers High Liquidity: Overnight Mutual funds are regarded as one of the most liquid investment options available. It allows investors to redeem their funds efficiently and in no time.
- Low Cost: The Overnight Mutual Funds incur low costs as their holdings do not need to be monitored and managed for prolonged periods. Most Overnight Mutual Funds have an expense ratio of 1%, however this can vary from scheme to scheme.
Who Should Invest in Overnight Funds
- Investors having low risk appetite: Since Overnight Funds have very low volatility, they carry minimal risk. They mature in one day, which builds in a high degree of resilience against interest rates fluctuations, credit risk etc., which is why these funds are best suited for investors who have a considerably low risk appetite.
- Investors seeking to park surplus cash: Investors who seek investments only for the purpose of parking extra cash at hand with an investment horizon of one week or less find Overnight Funds very attractive. Redemption in Overnight Funds is possible even after holding the units for a day.
- Investors moving to Equity Funds: Overnight Funds are the best option available to those who wish to insulate their funds against market risks until they move to Equity Funds. Such investors may, at a later stage, use Systematic Transfer Plan (STP) to move their investments into Equity Funds.
Overnight Funds Taxation
Investors earn capital gains and dividend income from Overnight Funds. Just like conventional Debt Funds and other Money Market Funds, earnings from Overnight Funds are subject to taxation under the tax laws.
Capital gain is the excess of the amount at which the units of a fund were redeemed over the amount at which the units were bought. The tax rate on capital gains is determined by the tenure of investment in the fund.
If an investor stays invested in a debt fund for up to 36 months, the capital gains earned are referred to as short-term capital gains. The short-term capital gains are added to the net income tax return of the investor and are taxed according to their income tax slab.
If an investor redeems the units of an overnight fund after holding it for more than 36 months, the gains earned are referred to as long-term capital gains. The long-term capital gains are taxable at a rate of 20% with the benefit of indexation. Indexation permits investors to inflate the purchase price using the cost inflation index.
Dividends in such cases will be taxable based upon the income-tax slab of the investor, or the tax will be deducted at source by the Mutual Fund in the case of an NRI, at the prevalent tax rates of that income tax slab before paying out investors or reinvesting the proceeds arising out of such investment.
Things to Consider Before Investing in Overnight Funds
Investors should be clear about the expectations they have from their Overnight Funds and equip themselves with adequate knowledge about these funds and their functions before investing.
Firstly, a good return is desirable on every investment made, hence, the rate of return is the first figure one should take into consideration before investing in Overnight Funds.
Secondly, the performance of these funds needs to be monitored for each because of its short tenure. So, one should be prepared to create a watchlist prior to making investments in Overnight Funds.
Thirdly, investors should make investments not as a result of recent incidents of credit default, but rather as a one step further towards achieving financial goals.
Frequently Asked Questions (FAQs)
1. How do Overnight Mutual Funds work?
The Assets under Management (AuM) of the Overnight Fund are held in cash at the beginning of the trading day and the fund manager makes investments in bonds that mature overnight. The proceeds of the maturity of the fund are further utilized to buy more bonds, which in turn, mature overnight, thus creating a cycle of funds.
2. How to Invest in Overnight Funds with Nivesh?
Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:
- Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
- On your portfolio page click on the Buy New tab at the right top corner of the screen.
- Select the category and choose the funds you want to purchase.
- If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
- Fill the transaction details and confirm. You can place up to 5 orders in one go.
- You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.
3. How do I Redeem my Overnight Fund?
Withdrawals from Overnight Funds is a simple process since these funds do not have an Exit Load. Redemption of Overnight Funds can be done using the investment mobile app used by the individual in the same way that all the other redemptions are made. It generally takes one to two working days for the redemption proceeds to be credited in the investor’s bank account.
4. Are Overnight Mutual Fund Schemes a Good Choice for Ultra-Conservative Investors?
Overnight Funds are considerably less risky than other, more conventional debt instruments, as the tenure of holding and maturity is one day, with little or negligible credit and interest rate risk and almost complete liquidity. So, it can be considered a good choice of investment for ultra-conservative investors.
5. How do I Choose a Good Overnight Fund?
By analyzing past performance of the fund and doing a thorough comparison of similar funds based on certain factors such as, NAV, returns and expense ratio, performance on a weekly or monthly basis etc., investors can get a feel of the market and choose a good Overnight Fund.
