What Are The Benefits Of Overnight Funds?

In the diverse landscape of mutual funds, overnight funds offer unique advantages, particularly for those seeking short-term returns with minimal risk. These funds provide a convenient way to park surplus cash while earning modest returns. By understanding what is overnight fund, and benefits of overnight fund, you can leverage them to enhance your financial strategy. An overnight mutual fund enables you to undertake easy investment in mutual funds and helps you unlock the many benefits of mutual funds. One among the many types of mutual funds, an overnight fund can be a great option for you. Let us consider the objectives, workings, and benefits of overnight funds, to help you decide if they fit your investment needs.

Understanding overnight funds

Overnight mutual funds are designed with specific objectives to meet the needs of short-term investors. Here are the primary goals:

• Low-risk investment: These funds invest in high-quality, short-term debt instruments like Treasury bills and commercial papers, which mature overnight. This strategy ensures minimal exposure to credit and interest rate risks.
• High liquidity: The one-day maturity period of the securities in overnight funds means investors can easily buy or sell their units, ensuring high liquidity and quick access to cash.
• Stable returns: By focusing on short-term debt instruments, overnight funds aim to provide stable returns without the volatility associated with longer-term investments.

How do these funds function?

Understanding the mechanics of overnight funds is crucial for making informed investment decisions. Overnight funds primarily invest in collateralised borrowing and lending obligations (CBLOs), overnight reverse repos, and other debt instruments with a one-day maturity. These funds are restricted from investing in longer-term, riskier debt securities, ensuring a low-risk profile. The income from overnight funds comes from the interest earned on the debt securities they hold. Due to their short maturity, these funds do not aim for long-term capital appreciation but rather provide consistent short-term income.

Advantages to consider

Investing in overnight funds offers several advantages, especially for conservative investors looking for short-term solutions. Firstly, overnight funds have a very short investment horizon, which means they are less affected by market volatility, interest rate fluctuations, and credit risks. The portfolio’s daily turnover helps shield it from these potential risks. Secondly, the high liquidity of overnight funds allows investors to withdraw their money with ease. You can buy or sell units at any time during the trading day, making them ideal for managing short-term cash needs. Further, if you have short-term financial goals, such as saving for a vacation or an upcoming event, overnight funds can be a perfect fit as they provide a safe place to park your money while offering better returns than a standard savings account. Finally, by investing in securities that mature overnight, these funds minimise the risk of losing principal. This makes them an attractive option for risk-averse investors. Given the many benefits of overnight funds, these are an extremely attractive investment option for a wide variety of investors.

Who should invest in overnight funds?

Overnight funds are suitable for various types of investors, as depicted below –

• Short-term Investors: Those looking to invest their money for a very short period can benefit from the high liquidity and low risk of overnight funds
• Conservative investors: Investors who prefers capital gain over better returns may find overnight funds appealing due to their low-risk nature
• Corporate treasurers: Businesses looking to manage their surplus cash efficiently can use overnight funds to earn returns while maintaining liquidity
• Idle cash management: For individuals or institutions with idle cash that they want to keep safe and accessible, overnight funds provide an excellent solution

Taxation norms to note

Capital gains are the profits earned from a mutual fund scheme, and they are subject to taxation. The tax rate applied to these gains depends on the duration of the investment in the mutual fund. Similar to debt funds, overnight funds are also taxed based on the length of the investment period. If you redeem your investment within 36 months, the gains are considered short-term and are taxed according to your income tax slab. Separately, investments held for more than 36 months are subject to long-term capital gains tax at 20% with indexation for units acquired before 1^st April, 2023. Any units acquired post 1^st April, 2023 any gains on overnight funds are categorized as short-term and added to the income tax slab. Any dividends received from overnight funds are taxed according to your income tax bracket.

Investing in overnight funds can be a strategic move for those looking to manage their short-term finances effectively. With benefits like low risk, high liquidity, and stable returns, these funds provide a safe haven for surplus cash. Whether you are a conservative investor or looking to manage idle cash efficiently, overnight funds offer a practical solution. By understanding their objectives, workings, and benefits, you can make informed decisions and enhance your financial planning. Consider the potential opportunities that overnight funds present and integrate them into your investment portfolio to achieve your financial goals. 

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