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What Are Overnight Mutual Funds?

As the name suggests, overnight mutual funds are open-ended debt funds that invest in overnight assets and securities. The scheme invests in bonds and securities purchased overnight, which mature on the next day. This matured fund is then reinvested in overnight funds, and the cycle continues. Due to the extremely short tenure, overnight funds are a low-risk and highly liquid investment.

Why should you invest in it?

In the broad spectrum of different mutual funds, overnight funds serve a few specific purposes. 

First, it is one of the most liquid forms of mutual funds. For investors who have idle funds but have a contingent need for the fund in the immediate future, overnight funds offer liquidity and daily return. Unlike debt-based investments like fixed deposits and bank deposits, overnight funds don’t have a prolonged lock-in period. 

It is an open-ended liquid fund, so there is minimal risk involved. Investors with a low-risk appetite and a liquidity preference would like to invest in overnight funds. Being an ultra-short-term investment, overnight funds are not prone to interest-rate fluctuations or credit risk. Any risk is easily addressed as the fund portfolio is updated regularly. 

Typical overnight fund investment and earning

As per SEBI guidelines, overnight funds can invest in debt or money market instruments that mature in a day. A typical overnight fund portfolio would comprise entirely of cash and cash equivalents. Overnight funds invest in collateralized borrowing and lending obligation, overnight reverse repos, and other single-day money market securities. Overnight funds are instructed to avoid deposits and risky debt instruments as they cannot have any default risk in their portfolio.

Overnight funds earn interest income on their investments. In a low-interest-rate scenario, the overnight rates decline in the money market as more liquidity floats in the market. Inversely, overnight rates rise with a rise in interest rates as short-term liquidity becomes less available. 

Things to keep in mind

Being a short-term debt fund, the returns in overnight funds can be comparatively low. An investor must invest in it if they have a low-risk appetite and also has a very short investment horizon. Investors seeking safe investments but with a longer investment horizon can go for liquid funds, which may hold better quality bonds and thus yield higher returns.

Overnight funds are mostly used to park funds for a day in highly liquid form. Return is not the key incentive in it, so plans like SIP are not very relevant in overnight funds. Having said that, there are different overnight funds in the market with varying returns and expense ratios. An investor can still manage to earn a little extra by choosing the right fund scheme. 


Find out more about the overnight funds and their returns on the Tata Capital Moneyfy App. If you are looking for a quick investment and the flexibility of entry and exit, exploring the Moneyfy App will help you to find the overnight fund that suits your financial goals best.