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All You Need to Know About Overnight Funds

Updated on :  

08 min read.

The outbreak and spread of coronavirus have had a massive impact on the markets. Equity markets around the world have taken a hit and have fallen to their multi-year lows. This has raised concerns among investors, and they have now started investing in overnight funds. We have covered the following in this article:

What are Overnight Funds?

The meagre performance of liquid and debt funds of late has made several debt investors rethink their investment strategies by turning towards overnight mutual funds. These funds are known to be investor-friendly and come with a host of benefits. The Securities and Exchange Board of India (SEBI) defines overnight mutual funds as open-ended debt funds that invest predominantly in the overnight assets and securities.

In simple words, overnight funds are a form of a specific debt fund. Investors can enter and exit these funds in the trading hours. At the start of every business day, the funds are held in cash. The fund manager will go on to invest in bonds overnight, and they mature by the next business day. The fund managers will buy more such securities overnight. The cycle will continue.

Objective of Overnight Funds

The main aim of overnight funds is to provide investors with the option of utilising their money in a much better way. The following characteristics of overnight funds make their objectives more achievable:

  • Overnight mutual funds have a very short investment horizon as they mature in just a day. This will allow the investors to make better utilisation of the surplus funds that they have at their disposal.
  • Overnight funds are relatively less risky as they have a very short investment horizon. The investors’ money matures almost instantly and hence limits the extent of the risk that the investment will be subject to.
  • Overnight funds are known for their high liquidity. This will allow investors to redeem their money in almost no time, unlike other mutual funds.

Taxation of Overnight Funds

Overnight funds are taxed like a debt fund. Units of overnight funds held for less than three years are subject to short-term capital gains tax. Investors will be taxed as per their income slab. Units of overnight funds held for more than three years are subject to long-term capital gains (LTCG) tax at the rate of 20%. Investors are provided with the benefit of indexation. Dividends earned from investments in overnight funds are taxable as per the investors’ tax slab (the classical method of taxing dividends).

Benefits of Overnight Funds

Overnight funds are ideal for those with an extremely short investment horizon. These mutual funds are safe as they are not exposed to high-risk assets and securities. Therefore, risk-averse investors may consider investing in these funds. The following are the benefits of investing in overnight mutual funds:

  • These funds are a better means to utilise one’s idle money. These funds provide much higher returns than any other investments that have a very short-term investment horizon.
  • Since these funds mature within a day, they are not exposed to high risk. Therefore, overnight funds are an excellent investment option for risk-averse investors.
  • Investors don’t have to pay a hefty penalty for having a very short-term investment tenure. Other safe investment options such as fixed deposit will levy penalties for failing to stay invested for a specific duration.
  • Overnight funds are a great option at times of uncertainty and market crisis.
  • As these funds are highly liquid, investors can fall back on these at times of emergencies.

Investors, to make the most of the overnight funds, must understand how these funds work before investing. Also, it would help if investors gain some knowledge of risk-reward concerning debt fund investments. This will give investors a heads-up as to what they could expect from overnight mutual funds.

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