As the name suggests, an overnight fund is a fund that invests predominantly in overnight securities having a maturity of one day. Overnight mutual fund schemes are favoured investment categories amongst debt funds for the investors seeking a very short-term parking of surplus funds.
Let’s learn more about the salient features of overnight funds.
What are Overnight Funds?
Overnight funds are debt mutual funds that invest largely in one-day maturity instruments. Accordingly, underlying securities in the portfolio matures the next working day, so interest-rate risk is practically minimalist, and credit risk is tightly controlled. These funds may invest up to 5% portfolio in GSECs/T-Bills having up to 30 days residual maturity for the purpose of placing the same as margin and collateral for certain transactions. Think of overnight funds as a professional, low volatility parking bay for cash you’ll need very soon.
Features of an Overnight Fund
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Minimal duration risk. Since the major portfolio matures in one business day; duration risk is minimalist.
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High liquidity. Purchase/redemption is usually T+1; some AMCs allow instant redemption (limits apply).
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Low volatility. Daily NAV moves are tiny because securities mature every day.
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Quality bias. Predominantly Tri-party Repo (TREPS), reverse repo with RBI-approved counterparties, and very short sovereign/PSU money-market paper.
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No exit load in most schemes. Check the scheme documents, but overnight funds rarely penalise quick exits.
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Low expense ratios. Typically, among the lowest in debt categories; still, costs may matter because gross yields are modest.
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Use case. Park cash for days to a few weeks, emergency buffers, or as a sweep account before you stagger money into other investments.
How Does an Overnight Fund Work?
Each business day, the fund buys overnight collateralised instruments—mainly TREPS or reverse repo—backed by government securities held at a central clearing entity. At T+1, those positions mature and the fund receives principal plus the one-day carry. The manager then reinvests the entire corpus into fresh overnight debt securities. Because the majority of the underlying securities matures daily, the portfolio doesn’t get whipsawed by rate moves, and credit events are unlikely. Cash for redemptions is met from the day’s maturities; hence the consistent T+1 settlement.
How Should You Invest in Overnight Funds?
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When and for how long. These funds might be suitable for a few days to a few weeks.
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How much. Park only what you genuinely need soon—travel bills, tax instalments, premiums, margin money, or proceeds from asset sales awaiting deployment.
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Mode. Investors can consider choosing the Growth option and setting up an STP (systematic withdrawal plan) if they plan to redirect into equity or longer-duration debt.
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Platform. Buy via AMC website/app or your broker/distributor. Ensure KYC and bank mandate are in place.
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Selection. Prefer funds with dominant TREPS/reverse repo, low expenses, reasonable AUM, and a clean track record.
Why Should You Invest in Overnight Funds?
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Don’t leave cash idle. Earn the money-market rate on short-term balances instead of a lower rate in current/savings accounts.
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Operational flexibility. Daily liquidity, predictable settlement, and STP compatibility make cash management easy.
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Risk control. One-day maturity slashes duration risk; collateralised structures reduce credit risk.
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Behavioural hygiene. Keeps your “soon-needed” money away from equity temptation, so long-term allocations stay intact.
Taxation Rules of Overnight Funds
Overnight funds are non-equity for tax purposes.
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For units purchased on or after 1 April 2023, all capital gains on redemption are considered as short term irrespective of holding period and taxed at the applicable slab rate without indexation.
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Legacy units bought before 1 April 2023 retain earlier rules for those specific units at sale.
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If you opt for the Income/Dividend option, dividends are taxed at slab rates; TDS applies as prescribed.
Many investors consider using the Growth option and redeem only what they need; tax applies only to the gain portion of the units sold.
Conclusion
Overnight funds are among the lowest-volatility investments in mutual funds. They can be used for parking cash for days or weeks, but not as a return-chasing product. Consider choosing a low-cost scheme, respect settlement timelines, and upgrade to liquid or ultra-short funds if your holding period extends. Bottom line: keep the long-term money in growth assets and let overnight funds handle short-term needs with relative stability and peace of mind.
FAQs
Are overnight funds risky?
Risk is very low, but not zero. Daily maturities curb interest-rate risk and collateralised repos reduce credit risk. Extreme market stress can still cause small, temporary NAV moves, but drawdowns are typically negligible.
Who should invest in these funds?
Anyone parking short-term cash—salaried users awaiting payments, businesses managing payables, traders holding margin buffers, or households building a rainy-day stash before paying near-term bills.
What is the major benefit of investing in an overnight fund?
Speed with relative stability. You get quick access (usually T+1) and a market-linked yield, while avoiding the volatility of longer-duration debt and the lock-ins/penalties of fixed deposits.
Disclaimer: Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
