In the world of investing, not all investors are looking for long-term growth or high-risk opportunities. Some prioritize safety, liquidity, and modest returns over time. For such investors, overnight funds have become an increasingly popular choice. These are a type of debt mutual fund that invests in securities with an extremely short maturity, typically one business day. They offer a convenient way to park surplus funds while earning better returns than a regular savings account.
What Are Overnight Funds?
Overnight funds primarily invest in overnight securities such as treasury bills, certificates of deposit, and commercial papers that mature the next business day. Because these funds hold instruments with very short durations, the risk associated with interest rate fluctuations is minimal. The NAV (Net Asset Value) of overnight funds changes slightly from day to day, reflecting the tiny interest earned on the securities, but overall, these funds are considered very low-risk.
Advantages of Investing in Overnight Funds
- Safety: Overnight funds invest in high-quality, short-term debt instruments, which minimizes credit risk. The short maturity also reduces exposure to interest rate volatility.
- Liquidity: Investors can redeem their units quickly, often within a day, making overnight funds highly liquid. This flexibility is particularly useful for businesses, freelancers, or individuals who need quick access to cash.
- Better Returns than Savings Accounts: While the returns on overnight funds are modest, they are generally higher than what a regular savings account offers. This makes them an attractive option for parking funds temporarily.
- Tax Efficiency: In many jurisdictions, overnight funds are treated as short-term capital gains for taxation purposes. They can also be a tax-efficient alternative to keeping large amounts of cash idle.
Overnight Funds vs. Liquid Funds
Overnight funds are often compared to liquid funds, another type of debt mutual fund. While both funds are low-risk and highly liquid, there are key differences. Liquid funds invest in debt instruments with maturities up to 91 days, whereas overnight funds stick to a one-day maturity. As a result, overnight funds generally carry even lower risk than liquid funds, although the returns may be slightly lower. For investors who prioritize absolute safety and want minimal fluctuations in NAV, overnight funds are usually preferred. On the other hand, liquid funds might offer slightly higher returns with a marginally higher risk due to longer maturities.
Who Should Invest in Overnight Funds?
Overnight funds are suitable for investors with very short-term financial goals or those who want to park their surplus cash temporarily without exposure to market risks. They are also useful for keeping emergency funds, managing business cash flows, or creating a temporary stop-gap before moving money into other investment instruments.
Conclusion
In a market where investment options range from high-risk equities to low-yield savings accounts, overnight funds provide a safe, liquid, and convenient solution for short-term parking of money. With minimal risk, quick accessibility, and slightly better returns than traditional savings, these funds serve as an effective bridge between idle cash and long-term investments. While liquid funds remain a popular alternative for short-term investing, overnight funds appeal to those who prefer maximum safety and near-zero interest rate risk.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
