What is an overnight fund – Meaning, Benefits, Taxation and More

Be it a child cutely crying at the barber shop or a local peanut seller singing badam badam to attract customers, you know that one can become an internet sensation overnight. But did you know that a lot can happen overnight even in the case of mutual funds? All thanks to overnight funds. What is an overnight fund? Let’s find out.

What is an overnight fund?

The name says it all! Overnight funds are mutual funds that invest in overnight securities that have a maturity of one day. These securities include Tri Party Repos, T-Bills, Certificate of Deposits, Commercial Papers, etc. Such funds are open-ended, highly liquid, and relatively safer than other types of mutual funds, particularly other debt funds.

How do overnight funds work?

At the beginning of each business day, the fund managers invest the money into overnight securities that mature the next business day. They then use the proceeds thereof to buy more overnight securities and this cycle goes on.

Overnight funds can be easily and quickly converted into cash. Your redemption request will generally be processed within one business day. The cut-off timings for the applicability of the Net Asset Value (NAV) while purchasing units and redeeming units are 12:30 pm and 1 pm respectively.

Importance of overnight mutual fund Investments

While you have already understood overnight funds meaning, let us consider the importance of overnight mutual fund before heading to the benefits of overnight funds and how they work to offer you optimal returns. Overnight funds meaning investments in one-day securities play a crucial role in the investment landscape, and here are some key reasons why overnight investments are important:

Safety: Overnight investments, such as money market funds, provide a high level of safety as they typically invest in low-risk instruments, such as government securities and high-quality short-term debt instruments. The short-term nature of these investments ensures that funds can be easily accessed and liquidated when needed, providing investors with immediate access to their capital.

Capital preservation: Overnight investments focus on preserving capital rather than generating significant returns and are particularly suitable for investors who prioritise the safety of their principal amount. By investing in low-risk instruments with minimal exposure to market fluctuations, overnight investments provide stability and reduce the risk of capital erosion.

Cash management: Overnight investments are ideal for cash management purposes and businesses, institutions, and individuals often utilise overnight investments to park excess cash temporarily.

Let us now take a look at how these funds work to offer you optimal outcomes.

How are overnight funds taxed?

Your gains on investments held for three years or less are short-term capital gains and will be taxed as per your income tax slab. Your gains on investments held for more than three years are long-term capital gains and will attract a 20% long-term capital gains tax. However, you will get indexation benefits in this case. This means the purchase cost of your mutual fund investment will be adjusted for inflation.

What are the benefits of overnight funds?

1. Better use of surplus funds:You can park your savings in overnight funds and earn relatively higher returns than a savings bank account.
2. High liquidity:Unlike fixed deposits, you can withdraw your money anytime. This is particularly helpful for building an emergency fund or meeting short-term goals.
3. Low-risk funds:There is negligible interest risk and credit risk in overnight funds. Such funds are unlikely to be affected by interest rate changes because the investment horizon is extremely short. They also have minimum credit risk because it is unlikely for overnight securities to default on interest payments.
4. Low cost:Such funds are low-cost debt funds since most of them have an expense ratio below 0.5%.

Who are overnight funds suitable for?

Now that you understand the meaning and features of overnight funds, you can decide if they are suitable for you.

Overnight funds may be ideal for you:

1. If you want to be emergency ready
2. If you want to invest to earn some returns without taking risks
3. If you have short-term goals in the next one to three months

To sum it up

Overnight funds are highly liquid and relatively safer debt funds that can be used for creating an emergency fund or meeting short-term goals.

An investor education initiative by Edelweiss Mutual Fund

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