What is Overnight Fund?
An overnight fund is a type of open-ended debt mutual fund that invests exclusively in instruments with a residual maturity of one day. These schemes aim to earn returns by rolling over short-term securities daily, resulting in very low interest-rate risk and high liquidity compared to other debt funds.
Definition of Overnight Fund
Overnight funds are defined by SEBI as debt schemes that invest in securities maturing the very next day. Unlike liquid funds (maturity up to 91 days) or ultra-short-duration funds (3-6 months), overnight funds lock in every investment for just one day, automatically reinvesting proceeds into new overnight instruments.
Meaning of Overnight Fund
In practical terms, an overnight fund serves as a cash-equivalent vehicle. Investors park surplus funds without exposing themselves to significant market volatility. By investing in overnight securities which could include Treasury bills, reverse repos, or collateralized borrowing and lending obligations (CBLO) these funds seek to deliver returns marginally above savings bank rates while maintaining principal preservation.
How Does Overnight Fund Work?
Every day, the fund manager invests the portfolio’s assets into instruments that mature the next business day. At maturity, the proceeds comprising principal plus interest are immediately reinvested in freshly issued overnight securities. This continuous “rolling” process ensures that the fund’s holdings always consist of 24-hour maturity instruments. Because of the daily rollover, the average maturity of the portfolio remains extremely low, minimizing interest-rate sensitivity.
Types of Overnight Fund
Within the overnight fund category, schemes are typically available in two plan structures:
- Direct Plan: Offered directly by the asset management company (AMC), with a lower expense ratio since no distributor commission is included.
- Regular Plan: Sold through intermediaries and includes distributor commissions, resulting in a slightly higher expense ratio.
Apart from plan type, overnight funds may also be segmented by investor category (e.g., institutional vs. retail), though the investment strategy remains uniform across segments.
Benefits of Overnight Fund
- High Liquidity: Funds can be redeemed at any time without exit loads, often with same-day settlement.
- Low Volatility: Minimal sensitivity to interest-rate movements due to one-day maturity.
- Competitive Returns: Typically offer yields slightly above savings accounts, making them attractive for short-term parking of cash.
- No Exit Load: Most overnight funds do not charge an exit load, allowing investors maximum flexibility.
Features of Overnight Fund
- Residual Maturity: Exactly one business day for all holdings.
- Expense Ratio: Among the lowest in debt fund category (often 0.05%-0.10%).
- Credit Quality: Invests primarily in sovereign or high-quality instruments, resulting in low credit risk.
- Exit Load: Typically nil, enhancing ease of liquidity.
- NAV Volatility: Extremely low day-to-day NAV fluctuations due to short duration.
Examples of Overnight Fund
Some of the prominent overnight funds available in India include:
- Bank of India Overnight Fund
- Axis Overnight Fund
- Mirae Asset Overnight Fund
- Nippon India Overnight Fund
- HSBC Overnight Fund
- Tata Overnight Fund
- Mahindra Manulife Overnight Fund
- Aditya Birla Sun Life Overnight Fund
- DSP Overnight Fund
- Kotak Overnight Fund
- Baroda BNP Paribas Overnight Fund
- LIC MF Overnight Fund
- UTI Overnight Fund
- Bandhan Overnight Fund
- PGIM India Overnight Fund
- Union Overnight Fund
Components of Overnight Fund
Overnight funds typically invest in:
- Treasury Bills (T-Bills): Sovereign securities issued by RBI, providing the highest safety.
- Collateralized Borrowing and Lending Obligations (CBLO): Triparty repo transactions with minimal credit risk.
- Reverse Repo: Secured overnight lending to RBI or other approved counterparties.
- Call Money: Unsecured overnight loans between banks.
These components ensure that the portfolio has 100% exposure to instruments maturing within one business day.
Objectives of Overnight Funds
- Capital Preservation: By investing in ultra-short-maturity instruments, the primary goal is to protect principal.
- Liquidity Management: Provide investors with a cash-equivalent option for parking surplus funds.
- Stable Income: Earn returns marginally higher than bank deposit rates without taking significant risks.
Taxation Rules of Overnight Funds
Overnight funds are taxed under the debt fund taxation regime in India:
Short-Term Capital Gains (STCG):
- Applicable if held ≤ 36 months.
- Gains are added to the investor’s income and taxed as per their slab rate.
Long-Term Capital Gains (LTCG):
- Applicable if held > 36 months.
- Taxed at 20% with indexation benefits on the purchase cost.
Dividend distributions (if opted) attract Dividend Distribution Tax (DDT) before distribution, although DDT was abolished post-April 1, 2020, making dividends taxable in the hands of investors as per their slabs.
How to Find Out Best Overnight Fund?
When selecting an overnight fund, consider:
- Expense Ratio: Lower expense ratios directly enhance net returns.
- AUM Size: Larger AUM often indicates investor trust and better liquidity.
- Credit Quality: Look for funds with a high percentage of sovereign securities.
- Consistency of Returns: Compare rolling returns over 1- and 3-year periods.
- Fund House Reputation: Prefer AMCs with strong risk management and transparent reporting.
List of Overnight Funds in India
Below is a representative list of Overnight Funds from leading AMCs:
AMC | Scheme Name |
---|---|
Axis Mutual Fund | Axis Overnight Fund |
Bank of India Mutual Fund | Bank of India Overnight Fund |
Baroda BNP Paribas Mutual Fund | Baroda BNP Paribas Overnight Fund |
DSP Mutual Fund | DSP Overnight Fund |
HDFC Mutual Fund | HDFC Overnight Fund |
ICICI Prudential Mutual Fund | ICICI Prudential Overnight Fund |
Kotak Mahindra Mutual Fund | Kotak Overnight Fund |
LIC Mutual Fund | LIC MF Overnight Fund |
Mahindra Manulife Mutual Fund | Mahindra Manulife Overnight Fund |
Mirae Asset Mutual Fund | Mirae Asset Overnight Fund |
Nippon India Mutual Fund | Nippon India Overnight Fund |
PGIM India Mutual Fund | PGIM India Overnight Fund |
SBI Mutual Fund | SBI Overnight Fund |
Tata Mutual Fund | Tata Overnight Fund |
UTI Mutual Fund | UTI Overnight Fund |
Best Tips to Consider Before Investing in Overnight Funds
- Compare Expense Ratios: Even small differences can impact annualized returns.
- Check Fund AUM: Ensure there’s sufficient liquidity, especially for large redemptions.
- Review Historical Performance: Look for stable NAV movements and consistent yield.
- Assess Credit Profile: Prefer funds with high sovereign or AAA-rated exposure.
- Understand Tax Implications: Align holding period with tax optimization strategies.
- Plan Cash Flows: Use overnight funds to manage short-term liquidity needs rather than long-term goals.
How Overnight Funds Help with Your Investment Portfolio Diversification?
Overnight funds act as a cash-equivalent sleeve within a broader portfolio. By allocating a small portion to overnight funds, investors can:
- Reduce Overall Volatility: Offset equity market swings with stable, low-risk instruments.
- Maintain Liquidity: Have funds readily available for opportunities or emergencies.
- Optimize Returns on Idle Cash: Earn yields above traditional savings instruments. This complements longer-term holdings in equity or hybrid funds.
Why to Invest in Overnight Funds?
- Safety First: Minimal interest-rate and credit risk compared to other debt categories.
- Better Than Bank Deposits: Typically offer higher post-tax returns than savings bank rates.
- Operational Ease: No exit loads and quick settlement make them ideal for treasury management.
- Tax Efficiency: Indexation benefit for long-term holdings reduces tax outgo.
How to Invest in Overnight Funds?
- Complete KYC: Ensure your KYC is updated via CAMS/Karvy or through your broker platform.
- Choose a Platform: Invest directly on AMC websites or via third-party platforms like ET Money, Groww, or Zerodha.
- Select Plan & Option: Decide between direct vs. regular plan and growth vs. dividend option.
- Place Order: Specify amount or units, and submit payment through net banking, UPI, or cheque.
- Monitor & Redeem: Track NAV online and redeem instantly when needed typically credited within T+1.
Risks Involved with Overnight Funds
- Reinvestment Risk: Yields may fluctuate when rolling over to new overnight securities.
- Counterparty Risk: Though minimal, exposure to reverse repo or call money counterparties carries some credit risk.
- Tracking Error: Operational lags could cause minor discrepancies between anticipated and actual returns.
- Tax Changes: Regulatory amendments to debt fund taxation could affect post-tax yields.
Comparison with Other Funds
Overnight Funds vs. Debt Funds
Aspect | Overnight Funds | Other Debt Funds |
---|---|---|
Maturity | Exactly 1 day | Varies (2–10+ years) |
Interest Rate Risk | Negligible | Higher, depending on duration |
Liquidity | Very high (no exit load, T+1 settlement) | Moderate to high (may have exit loads) |
Credit Profile | Primarily sovereign or overnight repos | Mix of corporate, government, and money market |
Returns | Modest, close to interbank call rates | Potentially higher, but with greater risk |
Overnight Funds vs. Liquid Funds
- Maturity: Overnight funds limit to one day; liquid funds invest up to 91-day instruments.
- Volatility: Overnight schemes exhibit lower volatility than liquid funds.
- Returns: Liquid funds may slightly outperform overnight schemes during yield curve steepness but carry marginally higher risk.
Overnight Funds vs. Equity Funds
- Risk-Return Profile: Overnight funds prioritize capital preservation; equity funds chase growth with high volatility.
- Time Horizon: Overnight schemes suit very short horizons (1-7 days); equity funds require 5+ years for risk mitigation.
Overnight Funds vs. Retirement Funds
- Objective: Retirement funds invest in a diversified mix for long-term wealth creation; overnight funds focus on liquidity and safety.
- Lock-in Period: Retirement schemes often have longer lock-ins; overnight funds have no lock-in.