What is an Overnight Fund?

Owing to the poor performance of liquid funds, there has been a noticeable shift of debt-based investment option towards overnight Mutual Funds. The steep inclination can be accredited to the fund’s investor-friendly features and their associated benefits.

The Overnight Fund is described by the Securities and Exchange Board of India as an open-ended debt Mutual Funds schemes that park 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 the 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.

Purpose 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.


Like debt funds, an overnight fund is subject to taxation. If an investment is held for more than 3 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%.

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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 decides to opt for the dividend option, they need to pay 29.12% as dividend distribution tax on their overnight fund.

Major Advantages

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.

Investors should also clear their misconceptions when it comes to the risk-reward aspects of debt funds. It will help them understand what to expect from their investment in overnight fund Mutual Funds India.

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