What Are Overnight Funds? What Are the Various Benefits That They Offer?

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What Are Overnight Funds? What Are the Various Benefits That They Offer?

Overnight Funds: An Overview

Since the Covid-19 outbreak started, everyone knows that stock markets around the world have lost money. Because of this, many people are looking for overnight funds and other alternatives to diversify their portfolios. Due to the poor performance of liquid funds, investors have also moved away from debt-based investments and toward overnight mutual funds. The main reasons are that the fund is easy and has many benefits.

What are Overnight Funds?

Overnight mutual funds are open-ended debt funds that invest in debt instruments with a maturity date of the next day. Every day, the securities in the portfolio will mature, and the manager will use the money to buy new securities with the same maturity date as the ones from the day before. Because the securities in these funds mature the next day, they are not as risky as other debt funds.

What are the Objectives of an Overnight Fund?

The purpose of the overnight fund is to give investors more options for making good use of the cash they have on hand. The following aspects of allotted funds help achieve their goal:

  • An investment in an overnight mutual fund is ready to be taken out after just one day. With such a short time frame, investors may be able to do more with their extra money.
  • Due to the short investment horizon and quick maturity, the funds don't have to deal with many risks.
  • These funds are some of the best ways to invest money. In a nutshell, it makes it easier for investors to access their money.

How Do Overnight Funds Work?

The Securities and Exchange Board of India (SEBI) rules say that these funds can only be used to buy money market products with a maturity date of one day or less. Because of these limits, the investor's portfolio default risk is cut down. This is because there is a low chance that interest payments won't be made on securities that mature in one day.

The only way overnight money can earn anything is by being paid back with interest on loans. This happens when the people in charge of overnight funds buy short-term assets with a one-day maturity. The fund manager invests the securities due in more overnight securities.

Who Should Invest in Overnight Funds?

The following types of investors can make overnight deposits:

Short-term investors

Overnight funds are best for investors who plan to keep their money for less than a week. This is because investors can get their money out of the funds in as little as one day. Overnight funds give this liquidity, but it is not given by liquid funds, which charge a fee for withdrawals made within seven days.

Risk-averse investors

If you want to protect yourself from stock market volatility, an overnight fund may be the answer you've been looking for. You can slowly and steadily transfer to an equity fund from these accounts. If investors buy stocks slowly and steadily over time, they might avoid the risks of making a big purchase all at once.

Best Overnight Funds To Invest In

(Data as of 26th October 2022)

Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns

Points to Remember Before Investing in Overnight Funds

  • Returns aren't at their best with overnight funds. They are safer and more accessible than a savings account. Overnight funds provide poor returns. Cost ratios and returns vary a lot between market funds. Investors should look at the market carefully and choose ETFs that are low-cost and do well.
  • Overnight fund investors must give up profits for safety and easy access to money. An investor's investment in an overnight fund should align with their financial goals and strategy, not react to recent credit defaults. Some money should be put into an overnight fund, but not all of it to avoid risk. If an investor isn't willing to take on much risk but wants to invest for a long time, say 36 months, liquid funds or ultra-short duration funds with high-quality bonds may give better returns.

Benefits of Overnight Funds

There are several good things about overnight funds. Some of the many benefits of overnight deposits are listed below:

Utilization of Idle Funds

People who have extra money and want to invest might want to think about this plan. When making their first investments, many people want to take as little risk as possible and make as much money as possible. This fund has the shortest time frame and similar or better returns than simple bank investments. Investing is a way to move toward your financial goals more quickly.

Flexibility in Investment

Investors can put their money into overnight funds and take it out whenever they want. After making the first deposit, you can reinvest the money daily or take it out. Investors who reinvest their money have a better chance of making money in the long run.

Low Risk and Safe

Unlike other investments, an overnight fund's value doesn't change much. Instead, it steadily goes up. There is less risk with overnight deposits than with short-term or liquid investments. Investors have moved their money from liquid funds to overnight mutual funds because liquid funds haven't done as well.

How are Overnight Funds Taxed?

Like a debt fund, the overnight fund has to pay taxes. Units of an overnight fund that have been held for less than three years are taxed as short-term capital gains. Investors will have to pay taxes based on their respective tax slabs. The long-term capital gains (LTCG) tax rate is 20% for overnight fund units held for more than three years. Investors can take advantage of indexation, which is one of its benefits. 


An overnight fund is a suitable alternative for a business owner who has to save a lot of cash until it's needed elsewhere. Instead of letting extra cash sitting in a checking account doing nothing, invest it in an overnight fund and start earning interest right away. These funds not only have the most cash on hand, but they also have the best chance of growing.

This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed. 

  • What are overnight mutual funds?

  • Are overnight deposits risk-free?

  • How can I invest in overnight mutual funds?

  • How can I redeem my investment in an overnight fund?