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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:
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.
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 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).
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:
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.