Overnight funds save money it will save you

Overnight Funds

Overnight Funds 

What are Overnight Funds?

Overnight Funds are open-ended Debt funds that invest in securities having a maturity of one business day. Such funds are highly liquid. (Investments can be converted to cash easily and quickly. Generally, redemption requests are processed within one business day). Also, they are relatively safer compared to other Debt Funds.

How do Overnight Funds work?

Overnight Funds invest in overnight securities or securities that mature in one business day. These include TREPs (Triparty Repo Dealing and Settlement)*, market repos, and securities having 1-day maturity.

What are the benefits of Overnight Funds?

Overnight Funds are desirable today because of the following advantages:


  • Better use of surplus funds:You may keep your money in a fixed deposit account, but withdrawals thereof may be subject to penalties. With Overnight Funds, you have enough liquidity as well as an opportunity to earn relatively higher returns compared to traditional savings instruments.**
  • Safety: Overnight Funds have negligible interest rate risk and credit risk. Given the extremely short investment horizon, such funds are unlikely to be affected by the changes in the interest rates. Further, as most investments are in TREPs where CCIL (Clearing Corporation of India Ltd.) acts as a counterparty to all trades, the probability of default is extremely low.
  • Low cost: Most Overnight Funds have an expense ratio lower than 0.30%, making them low-cost Debt Funds.

How are Overnight Funds taxed?

The tax treatment of Overnight Funds is the same as Debt Funds. If you stay invested for less than 3 years, your gains will be classified as short-term capital gains and will be taxed as per your tax slab rate (similar to traditional savings instrument). If you hold your Overnight Fund for 3 years or more, your gains will be subject to a 20% long term capital gains tax. However, in this case, you will get the benefit of indexation (available to Debt funds), which means your purchase cost will be adjusted for inflation. [Tax benefits are subject to prevailing tax laws.]

Who are Overnight Funds suitable for?

An Overnight Fund may be a good investment option in the current scenario for the following:

  • Investors who want to ensure liquidity and be emergency ready: You can redeem your units in an Overnight Fund even after one day. Thus, it is just like keeping the money at home but earning returns on it.
  • Risk-averse investors who want to temporarily park their money: Overnight Funds have the lowest investment risk as compared to other Debt Funds because the securities in such funds mature in a day’s time.
  • Investors who want to invest their idle money lying in their bank account: You may earn reasonable returns on your idle money in a safe manner.

To sum it up, Overnight Funds can be looked at as an emergency fund that earns reasonable returns and is easily accessible.
*The Reserve Bank of India defines Triparty Repo as follows: Tri-party repo is a type of repo contract where a third entity (apart from the borrower and lender), called a Tri-Party Agent acts as an intermediary between the two parties to the repo to facilitate services like collateral selection, payment and settlement, custody and management during the life of the transaction.
** With effect from 19th April 2020, the SBI interest rate on savings bank deposit account is 2.75% p.a.

***(Source-ICRAMFI Explorer, April 30, 2020)

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