Overnight Mutual Funds

There are many schemes and funds to invest in mutual funds.  Equity and debt are best among these, while they also have different categories.  One of these categories is Overnight Fund.   

What is Overnight Mutual Funds

Overnight funds help increase your money daily, these are debt funds that invest in overnight assets, or securities with a residual maturity of one day. This is a new category of debt funds that was introduced as part of SEBI’s mutual fund reclassification exercise in 2018.

overnight funds are open ended debt mutual fund schemes as per the definition of market regulator SEBI which invests in overnight securities with only one day maturity.  This means that the fund manager buys securities in these schemes on a daily basis.  These securities mature in a day and all the money is invested in buying new securities.  In this way, these schemes are very liquid.  Let’s know the whole thing about these funds.

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 How do Overnight Mutual Funds Work?

To understand how Overnight Funds work, you need to know where they invest and how they generate returns.

  • Where do Invest: Overnight funds invest in CBLOs, overnight reverse repos, and other debt or money market securities that mature in one day. This is in keeping with SEBI norms, which requires them to invest only in assets with overnight maturity. The entire asset holding of an overnight fund can be classified as “Cash and Cash Equivalents“. The portfolio of an overnight fund is replaced every day with new overnight securities. Overnight schemes are not permitted to invest in deposits or specified risky debt instruments; this rule aims to reduce the risk of default in their bond portfolio.
  • Sources of Earnings: Overnight funds earn only through interest payments on their debt holdings. There is no scope for earning capital gains as the securities held by the fund mature in one day. In fact, returns of overnight funds reflect lending and borrowing rates. When interest rates are falling, and short-term liquidity is abundant, overnight rates in the money market decline. When interest rates are rising, and market liquidity is tight, overnight rates increase. Thus, returns of overnight funds are closely linked to rates and conditions in the overnight market for funds.

Very Secure

There are very safe overnight funds which are considered the safest in the debt mutual fund category.  This is because their investment duration is very short.  It happens that these schemes are not affected by changes in interest rates and defaults in securities.  This is the reason why many investment experts say that these schemes are better for those who want to invest money for minimal risk with little extra return.  Experts, however, say that overnight fund are not the best option for Conservative Debt Mutual Fund investors.

Risk

Overnight funds are best for whom there is very little risk in overnight funds.  These funds are said to be the best for those who want to invest more money for less.  Generally large companies invest crores of rupees in such funds.  In fact, it happens that a small amount of small returns can also be enough.  As such, these funds are a better option for retail investors.  But it is difficult for retail investors in these funds to get additional returns.  But the best part is that overnight funds do not have a lock-in period.

Tax Planning

Also take care of tax Like other debt mutual funds, if the overnight funds are held for more than 3 years, they will be subject to indexation with long term capital gains (LTCG) tax.  If they are sold before three years, then you have to pay tax according to your tax slab.  If you choose the dividend option, then dividend distribution tax of 29.12% will be taxed.

Best Scheme

How to choose the best scheme If you are looking to invest in a mutual fund, then be aware that instead of recent performance, see long-term returns.  Some schemes can give high returns when the stock market goes up and can make you lose if the stock market goes down.  For example, a fund has given an average annual return of 19 percent in the last six years.  Such a fund is better than a fund that has a 28 percent return in the first three years, but a 3 percent percent annual return in the next three years.  Because its 6-year average return is 14.7 per cent and will not sustain against the 19 per cent fund.

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