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Overnight Fund

There has been a noticeable shift of debt-based investment options towards overnight Mutual Funds. The steep inclination can be accredited to the fund's investor-friendly features and their associated benefits. Let’s delve deeper and find what is an overnight fund along with its key features.

List of Overnight Mutual Funds

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What are Overnight Funds?

The overnight mutual funds are described by the Securities and Exchange Board of India as an open-ended debt Mutual Funds scheme that parks money into overnight securities. In other words, it is a liquid form of a particular debt fund.

Investors who wish to put their money in such schemes put forward a purchase and redemption request for their choice of overnight funds during trading hours.

At the beginning of each business day, the Asset Under Management (AUM) is in cash amount. The bonds are purchased overnight, and they mature by the following business day. Fund managers tend to take the cash amount to buy more of such bonds overnight, and the cycle continues.

Features of an Overnight Fund

The purpose of overnight funds is to offer investors the ability to use their cash reserve in a better and profitable way. The following features of the funds make its purpose more feasible -

  • Short investment horizon: The overnight Mutual Funds mature in just one day. This short-horizon allows investors to make better use of the extra cash they have at their hand.
  • Low-risk: The short investment horizon and instant maturity limits the funds' exposure to risk and keeps it to a bare minimum.
  • High-liquidity: The said funds are regarded as the most liquid investment securities. It enables investors to access their funds efficiently and in no time.

How Does an Overnight Fund Work?

According to SEBI regulations, these funds can only be used to purchase money market products with a maturity date of one day or less. The investor's portfolio default risk is reduced as a result of these constraints. This is due to the minimal likelihood of interest payments not being made on securities maturing on a single day.

Only by being paid back with interest on loans can such funds earn anything. This occurs when the managers of overnight mutual funds purchase short-term assets with a one-day maturity. The fund manager invests the due securities in additional overnight securities.

How Should You Invest in Overnight Funds?

You can invest in these funds either directly via AMC or through a trusted intermediary such as Groww. You can start investing in any mutual fund through Groww. All you have to do is download the application from the Play Store or App Store and complete the KYC process. Once you complete the registration and KYC, you will be able to invest the sum of your choice in the fund you find suitable. 

Why Should You Invest in Overnight Funds?

An overnight fund is a suitable option for those investors who want to invest their money in a fund but only for a short time. Since these funds do not get affected by the changes in interest rates and other defaults in securities, it is a safe debt Mutual Funds to invest in.

Here is a list of other benefits of the overnight Mutual Funds India in details -

  • Better utilisation of idle funds: The fund serves as a beneficial investment option for those investors who want to use their extra cash to earn a higher profit at a minimum risk. Unlike most bank deposits and fixed deposits with extended tenures, these funds allow investors to generate profits in a shorter tenor of days.
  • Low-risk factor: As mentioned before, this fund is an open-ended liquid fund, therefore, comes with low risk. The particular feature makes it a suitable investment option for those who have a low-risk appetite. It also works in favour of such investors who tend to possess a conservative outlook towards investments.
  • Safe against market volatility: The interest rate changes made by the RBI or the change brought about in the credit ratings of a borrower has a little to no effect on such funds. Its short investment horizon protects the investors of such funds against risks like interest rate fluctuations, uncertainty against liquidity, credit risk and cushions it against market volatility.

If there is any risk at all, the regular change in the fund's portfolio helps cushion them immediately.

  • Ease of liquidity: The funds do not have any entry or exit load; it further makes it very liquid. Investors can easily liquefy their investment in an emergency without compromising the invested amount.

To make the most of their investments in an overnight fund, investors must equip themselves with proper knowledge about how it functions in different situations.

To make the most of their investments in an overnight fund, investors must equip themselves with proper knowledge about how it functions in different situations.

Taxation Rules of Overnight Funds

Like debt funds, an overnight fund is subject to taxation. If an investment is held for more than three years, it will be subjected to the long-term capital gains tax with indexation.

In the case of indexation, debt funds are taxed at a rate of 20%. While in the case of funds without indexation, they are charged at the rate of 10%.

If an investor decides to sell off their funds before three years, they must pay a tax that matches their tax slab.

If an investor opts for the dividend option, they need to pay 29.12% as dividend distribution tax on the overnight fund.

FAQ

Q1. What is the overnight fund meaning?

Overnight mutual funds are a part of debt funds that invest in assets or securities with a one-day residual maturity.

Q2. Are overnight funds risky?

These funds are often called the most secure debt funds. They have near-zero interest rate risk and little credit risk.

Q3. Who should invest in these funds?

These funds are more suitable for short-term and risk-averse investors.

Q4. What is the major benefit of investing in an overnight fund?

Unlike other investments, the value of an overnight fund does not fluctuate much. Instead, it steadily rises. Overnight deposits are less risky than short-term or liquid investments.

Q5. Can I invest in an overnight fund instead of a bank FD?

Given the tax advantages of debt funds, they have the growth potential to produce greater returns than bank fixed deposits.

Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.

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