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What is Overnight Fund? Advantages of Overnight Fund

IndianMoney.com Research Team | Posted On Friday, March 13,2020, 05:49 PM

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What is Overnight Fund? Advantages of Overnight Fund

 

 

Mutual funds are a safe investment preferred by the common people. Overnight funds include the additional advantage of being highly liquid among others. As the name suggests, these are funds that invest in assets and securities that mature within a day. This is a kind of debt fund.

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What is Overnight Fund? Advantages of Overnight Fund

What are Overnight Mutual Funds?

Overnight mutual funds are open ended debt mutual funds. Liquidity is their major advantage. Recently, due to the poor performance of liquid funds, debt investors have shifted interest to overnight mutual funds.

Investors can put forward a purchase and redemption request in case they wish to buy an overnight fund during the trading hours. Further, the bonds are purchased overnight and mature by the next business day. Fund managers redeem the cash and use it to buy more such bonds. The cycle continues until profits are generated.

See Also: Best Liquid Funds 2019: Top 10 Liquid Funds

Things To Know While Investing in Overnight Fund

There are a number of features of overnight funds that you must consider before investing. These are:

  • Overnight funds invest exclusively in funds that mature within a day.
  • These funds are highly liquid in nature.
  • Returns are low because of their lower time horizon.
  • Low risk.
  • These are ideal for investors who do not want to invest for a long period of time.
  • It can be considered by investors as medical back up or emergency fund, because of high liquidity.

Advantages of Overnight Mutual Funds

  • Low risk: As it is an open ended liquid fund, the risk involved is low. This makes it an ideal option for investors with low risk appetite.
  • Better utilization of funds: Investors, who have surplus funds and look forward to make profit out of it, can invest in overnight funds. It helps generate profit within a short tenor. Unlike bank deposits, there is no extended tenure.
  • Safe against market volatility: Interest rate changes or credit ratings have no effect on these funds. The short tenure of overnight funds provides effective protection against the following: credit risk, uncertainty against liquidity, market fluctuations.
  • Highly liquid: There is no entry or exit load on these funds, making it highly liquid.
  • Short investment horizon: These funds enjoy the shortest time horizon. This makes it easy for investors to access funds whenever required.

See Also: Which Type of Mutual Fund Is Best to Invest?

How Overnight Mutual Funds are Taxed?

Overnight funds are subject to taxation.

  • If the funds are held for more than 3 years, then long term capital gains (LTCG) are taxed with indexation.  With indexation the taxation will be 20% and without indexation it will be 10%. 
  • If the funds are held for less than three years, gains will be taxed according to normal tax slabs.
  • If you select the dividend option, then dividend distribution tax at the rate of 29.12% is charged.

Risks of Investing in Overnight Funds

Low returns: The risks are negligible due to short tenor. However, before deciding to invest in overnight funds, you must check the returns of these funds. Due to their short tenor, the returns are lower.

The returns from an overnight fund for a month are typically in the range 0.46% to 0.48%. Expense ratio is charged for meeting the administration expenses of the fund. In most cases, profits are equivalent or nearly similar to the expense ratio, making it a no loss no profit scheme.

See Also: Everything You Need To Know About Mutual Funds

Top 5 overnight fund 2020

Fund name

AUM (Cr)

1 day returns

1 week returns

SBI overnight fund

Rs. 8,050

0.01%

0.09%

HDFC overnight fund

Rs. 9,765

0.01%

0.09%

UTI overnight fund

Rs. 2,802

0.01%

0.09%

Edelweiss overnight direct fund

Rs. 695

0.01%

0.10%

Sundaram overnight direct fund

Rs. 797

0.01%

0.10%

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