Overnight Debt Funds – Definition, Advantages & Should You Invest in Them?


  • Is your risk appetite the lowest? Maybe you should think of investing in overnight funds
  • These funds invest in securities for one day and sell the next day, enabling zero interest rate risk for investors

There are various types of debt funds that invest in different debt securities with varying maturities. These securities are corporate bonds, commercial papers, treasury bills, commercial papers, certificates of deposit, CBLO, and non-convertible debentures. The maturity profile of these securities ranges from 1 day to 10 years. Overnight funds are a type of debt funds, let us understand these better.

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What are Overnight Funds?

Overnight funds are open-ended debt mutual funds that invest in securities with overnight or one-day maturities. These securities are treasury bills, certificate of deposits, commercial papers, floating rate debt instruments. This implies that the fund manager buys these debt securities every day for a day and sells it the next day. He/she again buys these securities the next day, again for a day and this is how the portfolio is managed. Overnight funds do not invest into securities with a maturity profile of more than a day.

What are the Advantages of Overnight Funds?

These are the advantages of overnight funds:

  1. Low Risk – These funds carry the lowest risk amongst all debt funds since the portfolio holds only one-day securities, thereby enabling zero interest rate risk and very low credit risk. The portfolio is immune from the movement in interest rates and credit quality is pretty good since most of the lending is done to banks and highest rated corporates looking for short-term funds.
  2. Liquidity – Overnight funds are the most liquid amongst all debt funds. This means you can withdraw anytime without paying any exit load. Also, liquidity problems in the economy or banking system do not affect overnight funds since they are lent only for a day.
  3. An Alternative to Savings Bank Account – These funds are a good alternative to savings accounts since returns are 0.50-1.50% higher than savings bank accounts. Today, most of the savings bank accounts are offering 2.50-3.50% interest rate, whereas these funds deliver around 4-5% annualized returns.
  4. Taxation – These funds are taxed as per taxation of debt funds, but if you hold these funds for three years, you will be eligible for indexation benefit that drastically reduces the tax liability.
  5. No Volatility – Overnight funds are ideal for investors who fear volatility and do not want any risk but slightly higher returns. These funds’ NAVs move steadily with no volatility, making it a stable avenue to invest.
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Should You Invest in Overnight Funds?

We recommend investing in overnight funds if you are looking for an option with the lowest risk and slightly higher returns than a savings bank account. You can consider these funds as a good option to park your idle funds lying in savings bank accounts. These funds offer high liquidity, you can redeem/withdraw in a day if and when you need funds. You can also invest in these funds to start an STP (Systematic transfer plan) into equity funds. To know the best overnight funds, you can read another post of ours-FIVE BEST OVERNIGHT FUND TO INVEST.

Overnight funds are least risky, if you are looking for 1-2% higher returns than overnight funds with a slightly higher risk, we recommend you to invest in liquid funds. To know the five best liquid funds you can read another post of ours-https://www.wishfin.com/mutual-fund/5-best-performing-liquid-funds-to-invest-in/

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