All You Need to Know About Overnight Funds

Over the past few years, many investors have started moving their short-term surplus into overnight mutual funds. These funds have gained popularity thanks to their low-risk structure, high liquidity, and the ease with which they let you earn returns even for a day. Especially in uncertain markets, where safety and flexibility matter more than ever, overnight funds have quietly become a go-to option for cautious individuals and businesses alike.

What Are Overnight Funds?

The Securities and Exchange Board of India (SEBI) defines overnight mutual funds as open-ended debt schemes that invest exclusively in overnight securities with a one-day maturity. Overnight mutual funds are the most liquid variant of debt mutual funds, designed to offer a safe and short-term parking option for surplus cash.

The fund manager uses this cash to purchase one-day maturity instruments, typically Tri-Party Repos, Certificate of Deposit (CD), and Commercial Paper (CP), Treasury Bill (T-Bill), Cash Management Bill, Bills of Exchange, Repos, Floating rate Debt instruments, or call money that expire the next business day. 

This buying and maturing cycle is repeated daily, ensuring minimal credit risk, quick liquidity, and efficient fund utilisation without exposure to long-term market fluctuations.

How Does an Overnight Fund Work?

The Securities and Exchange Board of India (SEBI) defines overnight mutual funds as open-ended debt schemes that invest exclusively in securities with a one-day maturity. Simply put, overnight mutual funds are the most liquid variant of debt mutual funds, designed to offer a safe and short-term parking option for surplus cash.

When an investor places a purchase or redemption request during trading hours, the transaction is processed at that day's net asset value (NAV). At the start of each business day, the fund’s Asset Under Management (AUM) is held in cash. 

The fund manager uses this cash to purchase overnight instruments that mature the next business day. This daily cycle ensures minimal credit risk, high liquidity, and efficient fund utilisation without exposing investors to long-term market volatility.

Where do overnight funds invest?

Overnight funds allocate capital exclusively to debt and money market instruments that mature within a single day. This includes highly liquid and low-risk instruments such as Tri-Party Repos, Call Money, Treasury Bills (T-Bills), Cash Management Bills, Commercial Papers (CPS), Certificates of Deposit (CDS), and occasionally floating rate debt instruments with a one-day maturity. 

These assets are explicitly selected for their short duration and minimal credit risk, ensuring the fund’s portfolio resets daily. By limiting investments to such instruments, overnight funds maintain a very high level of safety and liquidity, making them ideal for investors looking to park money temporarily without exposure to market fluctuations.

How Should You Invest in Overnight Funds?

Investing in overnight funds is simple and accessible. You can go directly through the mutual fund company (AMC) or use a trusted platform. Download the app, complete your KYC (Know Your Customer) verification, and link your bank account. Once registered, you can browse various overnight funds and invest any amount. These platforms also allow you to track performance, redeem easily, and reinvest based on your short-term goals, from your phone or laptop.

Advantages of overnight funds 

• Offers the lowest risk among debt mutual funds due to one-day maturity instruments.
• Provides high liquidity with a T+1 redemption facility.
• No exit load, making it ideal for short-term cash parking.
• Delivers better returns than a regular savings account.
• Simple structure with daily maturity ensures transparency.
• Suitable for both individuals and corporations with idle cash.
• Minimal exposure to interest rate or credit risk.
• Allows easy entry and exit without lock-in constraints.

Disadvantages of overnight funds

• Lower returns compared to other debt or hybrid mutual funds.
• Not suitable for long-term wealth creation or capital appreciation.
• Gains are taxed at a per-slab rate, which can be high for individuals in upper tax brackets.
• A limited investment universe can only invest in one-day maturity instruments.
• Returns may fluctuate slightly due to changing overnight interest rates.
• May not beat inflation over the long term.
• The daily reinvestment cycle may lead to administrative inefficiencies for fund managers during tight liquidity conditions.

Taxation for overnight funds 

Overnight funds are taxed like any other debt mutual fund. However, as per the latest tax rules (effective April 1, 2023), the indexation benefit is no longer available, regardless of the holding period.

Therefore, any gains made from overnight funds are taxed as per the investor’s applicable income tax slab rate. For example, if you fall under the 30% tax bracket, the returns you earn from overnight funds will also be taxed at 30%, plus applicable cess and surcharge. This applies whether you redeem your investment after one day or one year.

Conclusion

Overnight funds may not offer high returns, but they offer something just as valuable, like safety, liquidity, and peace of mind. They’re the perfect place to park your idle money when you don’t want to take risks but still want your funds to earn something. Whether you’re a business with short-term surplus cash or someone waiting to use your money in a few days, these funds work quietly in the background, growing your money without locking it away.

If you’re looking for a low-risk, short-term investment option that’s easy to access and doesn’t require constant tracking, overnight mutual funds might be your most brilliant move. After all, why let your money sit idle when it can work for you, even if it’s just overnight.