Comparte Capital Investment

What are Overnight Funds?

Overnight funds are debt funds investing in debt securities

These funds' returns are closely linked to rates and conditions prevailing in the overnight market

The overnight fund falls under a new category of debt funds that SEBI introduced as part of its mutual fund reclassification exercise in 2018. To better understand how Overnight Funds work, let’s know where they invest and how they generate returns.

What are Overnight Funds?

Overnight funds are debt funds investing in debt securities or overnight assets with overnight maturities, which mean a residual maturity of one day.

What are the SEBI norms related to Overnight Funds?

It is an open-ended debt mutual funds scheme that park money into overnight securities. The total asset holding under overnight funds can be classified as “Cash and Cash Equivalents” or a liquid form. However, as per the SEBI norms, overnight funds invest only in assets having overnight maturity. These schemes are not permitted to invest in deposits or specific risky debt instruments under a rule to reduce the risk of default in their bond portfolio.

Where do Overnight Funds Invest?

Overnight funds invest in the overnight reverse repo, Collateralized Borrowing and Lending Obligation (CBLO), and other securities of money market or debt assets with one-day maturity. The portfolio consists of an overnight fund that gets replaced every day with new overnight securities.

How do Overnight Funds generate returns?

Sources of earnings of overnight funds are through the payment of interest on their debt holdings. There is hardly any scope for earning capital gains as the funds invest in securities that mature in one day. Overnight lending and borrowing rates are reflected in the returns of the overnight funds.

These funds’ returns are closely linked to rates and conditions prevailing in the overnight market for funds. When interest rates are falling, overnight rates in the money market decline, making short-term liquidity plentiful, whereas, when interest rates rise, making market liquidity tight, overnight rates increase.

What are the advantages of Overnight Funds?

Safest Debt Fund – Overnight funds are the safest among debt funds and are relatively safer than liquid funds with zero interest rate risk. There is no chance of earning capital gains or losses. Therefore the value of the fund does not show volatility but only increases slowly due to interest income.

 Near-zero credit risk ‐ As securities under this mature in one day, it is highly unlikely to default on interest payments. Investors can best utilize their extra money to earn a higher profit in a very short period at a minimum risk.

 Highly liquid – This is a big advantage of overnight funds over liquid funds. Investors can redeem their money in almost no time, unlike other mutual funds.

 Low cost – Overnight funds are low-cost debt funds, most with expense ratios below 1% as their debt holdings are not managed actively.

 Flexibility – Investors can enter and exit within the trading hours.

Who Should Invest in Overnight Funds?

Overnight funds are ideal for those with a very short investment horizon of one week or less and are looking for an alternative to bank accounts/deposits. Investors can redeem even after holding the units for one day. Investors who want to avoid any risks until they move to equity can hold funds in an overnight fund. They can use an STP to route investments systematically into an equity fund from these funds. It ensures that the corpus is held safely in the overnight fund; they can invest them in equity over time.

Things to Consider Before Investing in Overnight Funds

Though it is the safest category of debt funds, investors must keep in mind the following before investing.

Low returns – Overnight funds are safe, can be readily withdrawn but not designed to optimize returns. This category of funds offers relatively low returns that investors compromise primarily for safety and liquidity.

 Variation in returns & expense ratio – The variation among the different market funds in terms of returns and expense ratios exists. Hence investors need to carefully analyze the market and select the funds with a consistently good performance record and low cost.

 Align your financial goals – Investors need to align their financial goals with investment. If an investor’s risk appetite is low, but the investment horizon is 3‐6 months, instead of overnight funds, more returns can be earned from liquid funds or ultra-short duration funds holding high-quality bonds.


Holding investment for more than three years will attract long-term capital gains tax with indexation benefit at a rate of 20%. And for a period less than that, it is taxed as short-term capital gains.

To conclude, overnight funds offer safety, liquidity, and withdrawal flexibility. They can earn higher returns than bank savings deposits, especially given the tax advantages of debt funds. Talk to your financial adviser to invest..

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh / Enquire