Overnight Mutual Funds

In one of its circulars, SEBI explained the overnight mutual fund meaning, describing them as open-ended debt mutual funds that invest in overnight securities. In simple terms, they can be understood as highly liquid debt funds, which have a low risk exposure.

To understand what an overnight fund is, you must know how it works. As per the SEBI mandate, overnight funds can only invest in overnight securities. 

 

These include CBLOs, overnight reverse repos, and other debt securities with a maturity period of one day. CBLOs refer to Collateralised Borrowing and Lending Obligations. 

 

The portfolio of overnight funds is replaced by new overnight securities each day. These funds allow you to earn through interest received on debt holdings. 

 

The returns you can make depend on the overnight market and conditions. In other words, the overnight rates decline when interest rates fall and high liquidity is available. On the other hand, overnight rates rise in the money market when conditions are reversed.

Here are some of the perks of investing in an overnight mutual fund scheme:

• Safest Debt Funds

 

These funds have zero interest rate risk and minimal credit risk and, hence, are considered the safest debt funds. 

• Lower Investment Cost

   

As they are not managed actively, these are low-cost mutual funds operating at an expense rate below 1%. 

• Flexible Investment Horizon

 

Overnight funds allow investors the flexibility to enter and exit when they deem necessary.

The following are some of the drawbacks of investment in these funds:

• Sensitive to Interest Rate Fluctuations

 

The returns offered on overnight securities depend mainly on the interest rate, which can change if RBI decides to change the repo rate. 

• Lower Returns

 

While these funds have lower associated risk, they also offer reduced returns as compared to high-risk securities.

• Lack of Personal Control

 

As these funds are managed by fund managers, you do not have control over the investment strategy. 

When investing in overnight funds, you must bear the following factors in mind:

• Returns You Wish to Achieve

These funds are akin to savings accounts and are not designed to achieve capital appreciation. Hence, it is wise to invest in these funds if you have idle funds that you wish to park for a short span.

 

• Expense Ratio and Fund Variance 

The returns on overnight funds depend on the fund you choose as well as the expense ratio of that particular fund. It is best to analyse the market as well as the associated costs when investing in these funds.

 

• Taxation

Like other debt funds, you earn dividends on overnight mutual funds, which are not taxable in the hands of the investor. However, the capital gains that you make through investment in these funds attract taxes.  

 

If you withdraw the invested amount before three years, your capital gains are considered short-term gains and taxed as per your slab rate. On the other hand, if you stay invested for more than 3 years, the gains will be taxed at 20% with indexation.

Now that you have understood the meaning of overnight funds, you must assess if they are the right investment option for you. These funds are considered ideal for investors who wish to park their funds for a short period ranging between one week and two weeks.

 

The biggest benefit of these funds is their high liquidity as opposed to liquid funds. This is because the latter charges an exit load if you redeem your funds within seven days of investment. 

 

Additionally, being debt mutual funds, these funds are suitable for conservative and risk-averse investors. In conclusion, overnight funds are one of the safest debt funds as they have no interest rate risk and negligible credit risk. They also offer high liquidity and flexibility of withdrawal. 

 

Through overnight funds, you can enjoy a short investment horizon and high liquidity. On Bajaj Markets, easily explore a variety of mutual funds and other investment options to achieve your financial goals.