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What is Overnight Fund?

Mutual funds that only invest in money market securities with extremely short maturities—typically one day to one week—are known as overnight funds. They are an appealing option for people wishing to temporarily stash their extra money because they give investors a liquid and safe investment option. 

Purpose of an overnight fund

  1. Ensuring Safety

The primary aim of overnight mutual funds is to safeguard investors’ capital. By investing in low-risk securities like Treasury bills and government bonds with short maturities, these funds minimize the possibility of loss, ensuring a secure investment environment.

  1. Providing Liquidity

Another key purpose is to provide investors with quick access to their funds. Unlike other investment avenues, where funds may be locked in for a longer duration, overnight funds offer daily liquidity. This means investors can withdraw their money at short notice without incurring significant penalties.

  1. Capital Preservation

Overnight funds prioritize the preservation of capital over generating high returns. While the returns may not be as substantial as riskier investments, such as stocks or long-term bonds, these funds aim to maintain the initial investment amount, making them suitable for individuals seeking stability.

  1. Managing Cash Reserves

For institutions and corporations, overnight funds serve as an efficient means to manage cash reserves. By parking excess cash in these funds overnight, organizations can earn a modest return while ensuring funds are readily available for operational needs.

Features and benefits of overnight funds

Some of the key features and benefits of overnight mutual funds are:

  1. High Liquidity

As mentioned earlier, overnight funds invest in money market instruments with short maturities, making them highly liquid. This means that traders or investors can easily redeem their investments at any time without having to pay any exit load or penalty.

  1. Low Risk

Overnight funds are considered to be one of the safest mutual fund options as they invest in high-quality, low-risk securities such as Treasury Bills, Commercial Papers, and Certificates of Deposits.

  1. Stable Returns

Since overnight mutual funds invest in low-risk instruments with short maturities, they offer stable returns that are slightly higher than traditional savings accounts or fixed deposits.

  1. Diversification

By investing in a variety of money market instruments, overnight funds provide investors with a diversified portfolio that helps minimize the risk factor.

  1. Tax Efficiency

Overnight funds are considered to be tax-efficient as they are taxed at par with debt funds, which means investors can take advantage of indexation benefits for long-term gains and enjoy lower tax rates.

  1. Low Expense Ratio

Overnight funds have a low expense ratio, which means the cost of managing the fund is relatively low compared to other mutual funds.

  1. Ideal for Short-Term Investments

Due to their short-term nature, overnight funds are best suited for those looking to park their surplus cash for a period of 1 day to 1 week. They are also a great option for investors who want to avoid market volatility and are ready to compromise on higher returns for stability and liquidity.

How do overnight funds work?

  1. Pooling of Funds: Overnight funds pool money from multiple investors and invest them in various money market instruments.
  1. Investment Strategy: The fund manager of an overnight fund strategically allocates the funds into different securities based on their credit rating, maturity period, and other factors to ensure stable returns.
  1. Daily Investments: Since overnight funds have a short investment horizon, the fund manager buys and redeems securities on a daily basis to maintain the liquidity of the fund.
  1. NAV Calculation: The Net Asset Value (NAV) of an overnight fund is calculated using the current market value of all its underlying assets. This is done at the end of each business day.
  1. Expenses Deduction: The expense ratio, which includes management fees and other operational costs, is deducted from the NAV to arrive at the final NAV of the fund.
  1. Investor Redemptions: Investors can redeem their units in an overnight fund at any time and receive the current NAV per unit as their redemption value.

Who should invest in overnight funds?

Overnight funds are suitable for a wide range of investors, from conservative to aggressive ones. They are a great option for those looking to invest their surplus cash for a short period of time, as they provide low-risk and stable returns. They can also be used by investors as an option to savings accounts or fixed deposits, given their higher returns. 

Additionally, investors who want to diversify their portfolio and have some exposure to money market instruments can consider investing in overnight funds. However, it is important to note that overnight funds are not best for long-term investment goals as their returns may not beat inflation.

How to choose the right overnight fund?

When it comes to choosing the right overnight fund, there are a few key factors that investors should consider. Firstly, they should check the fund’s track record and performance over the years. A fund having a consistent track record of delivering good returns and managing risk well can be a good choice. It is also important to look at the expense ratio of the fund, that is, the annual fee charged by the fund house to manage the fund. Lower expense ratios mean high returns for investors.

Investors should also consider the credit quality of the money market instruments in which the fund invests. Funds with a higher credit quality are less risky and provide stable returns. Additionally, investors should check the fund’s portfolio diversification, as a well-diversified portfolio can help mitigate risk to some extent.

Tips for investing in overnight funds

Here are some tips that can help investors make the most out of their overnight fund investments:

  • Understand the fund’s investment objective and risk profile before investing.
  • Monitor the fund’s performance regularly to ensure it aligns with your investment goals.
  • Consider investing in multiple overnight funds to diversify your portfolio and mitigate risk.
  • Avoid timing the market and stay invested for a longer period of time to get the full benefit of compounding returns.
  • Keep an eye on the fund’s expense ratio and opt for funds with low expense ratio.
  • Invest in overnight funds through SIP (Systematic Investment Plan) to average out your investment cost and reduce the impact of market fluctuations.

The bottom line

Overnight funds are a great option for investors looking to park their surplus cash for a short period of time without taking on too much risk. They provide stable returns, high liquidity, and the flexibility to withdraw funds whenever needed. By understanding their features and benefits, how they work, and who should invest in them, investors can make informed decisions about including overnight funds in their investment portfolio. 

So, if you’re looking for a safe and liquid investment option with higher returns than traditional savings accounts or fixed deposits, consider investing in overnight funds.


What is the maturity period of overnight funds?

Overnight funds have a maturity period of 1 day to 1 week.

Can investors withdraw their money from overnight funds anytime?

Yes, investors can easily redeem their units from overnight funds whenever they need cash.

Are there any lock-in periods for investing in overnight funds?

No, unlike fixed deposits, there are no lock-in periods for investing in overnight funds, giving investors the flexibility to withdraw their money whenever needed.

Can investors diversify their portfolios by investing in overnight funds?

Yes, overnight funds provide exposure to money market instruments and can help diversify an investor’s portfolio.

How do investors choose the right overnight fund?

Investors should consider factors such as track record, expense ratio, credit quality of instruments, and portfolio diversification when choosing an overnight fund.

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