What is an Overnight Fund? Benefits & How It Works

When it comes to short-term investments with minimal risk, overnight funds offer stability and liquidity. These funds are a type of debt mutual fund, ideal for investors seeking safety over high returns. Whether you're looking to park idle funds or need a temporary place to hold money, overnight funds provide a low-risk, easy solution. In this article, we discuss what overnight funds mean, how they work, and the benefits of investing in them.

What is overnight funds’ meaning?

Overnight funds are debt mutual funds that invest in securities with a maturity period of just one day. This means that the fund’s portfolio is renewed daily as the securities mature each day. Because of this short duration, overnight funds carry minimal risk since they aren’t exposed to significant interest rate changes.

These funds are also highly liquid and offer stable returns, making them appealing to conservative investors. Some popular overnight funds in India include Axis Overnight Fund, DSP Overnight Fund, and Nippon India Overnight Fund.

How do overnight funds work?

Overnight funds invest in debt instruments that mature within one business day. Each day, the fund manager buys new short-term securities and sells them the next day when they mature. This daily process maintains liquidity as the fund continuously renews its assets.

Because these investments are only held for a single day, there are no capital gains. Instead, the fund earns income through interest. These funds also do not have entry or exit loads, making them cost-effective. The fund’s passive management also helps keep the expense ratio low.

What are the benefits of overnight funds?

Here are the key benefits of investing in overnight mutual funds-

1. Safety and low-risk

Overnight funds invest in securities that mature within a day, so they have very little exposure to market risk. This makes them one of the safest debt mutual fund options.

2. Ease of Liquidity

These funds have no entry or exit loads, making them highly liquid. Investors can quickly access their funds in case of an emergency without any significant loss in value.

3. Protection against market volatility

Changes in interest rates or credit ratings have little impact on these funds due to their short investment horizon. This protects investors from risks like interest rate fluctuations, liquidity issues, or credit risk.

4. Flexible investment option

For investors with a low-risk appetite, overnight funds offer a way to earn returns on idle cash. They provide a flexible alternative to savings accounts, often offering slightly better returns.

How should you invest in overnight funds?

To invest in overnight funds through Tata Capital Moneyfy-

1. Register your email ID and mobile number to create an account.

2. Complete your KYC process and update the required account details.

3. Once your KYC verification is complete, you can begin investing.

Parting thoughts

Overnight funds are perfect for investors looking to park their money temporarily while still earning some returns. These funds provide the highest liquidity and are ideal for short-term needs without exposing your investment to much risk. Overnight funding through such funds ensures that your money remains easily accessible while still growing modestly.

FAQs

Is an overnight fund better than an FD?

Overnight funds and fixed deposits suit different needs. FDs offer fixed, guaranteed returns and no risk, making them ideal for long-term stability. Overnight funds provide liquidity and slightly better potential returns, though not guaranteed. 

Is it safe to invest in overnight funds?

Overnight funds are safe because they invest in securities that mature in one day. This strategy minimises both credit and interest rate risks, significantly reducing the chances of default. They are a secure option for short-term financial goals.

What is an example of an overnight fund?

Examples of overnight funds include SBI Overnight Fund and Axis Overnight Fund. These funds invest in securities with a maturity of one day, ensuring high liquidity and safety. They are suitable for investors looking for secure and short-term parking of funds.

How many days can we hold an overnight fund?

According to SEBI regulations, overnight funds can only invest in money market securities with a maturity of one day or less. This rule ensures the portfolio has minimal default risk and offers investors a safe and flexible option for short-term investments.