What Are Overnight Funds?
Overnight Funds are debt mutual funds that invest in debt securities with maturity of exactly 1 day. These funds have the shortest possible duration and invest in overnight money market instruments like overnight repos, treasury bills, and other 1-day maturity securities. They offer the highest liquidity with minimal risk, making them ideal for parking funds for just one day or very short periods. Overnight funds provide returns similar to or slightly lower than liquid funds (3.5-5% per annum) while offering the highest level of liquidity and the lowest interest rate risk among all debt funds.
Key Features of Overnight Funds
1-Day Maturity
Invest in securities with exactly 1-day maturity, ensuring zero interest rate risk and highest liquidity.
Zero Interest Rate Risk
Complete elimination of interest rate risk due to 1-day maturity, providing maximum capital safety.
Highest Liquidity
Highest liquidity among all debt funds, with funds typically accessible the next business day (T+1).
Lowest Risk
Lowest risk among all debt funds, with minimal credit risk and zero interest rate risk.
Overnight Funds Characteristics
| Parameter | Description |
|---|---|
| Maturity Period | 1 day (exactly) |
| Risk Level | Lowest (among all debt funds) |
| Expected Returns | 3.5-5% per annum (approximate) |
| Investment Horizon | 1 day to few days |
| Interest Rate Risk | Zero (1-day maturity eliminates interest rate risk) |
| Credit Risk | Minimal (typically invest in highly rated instruments) |
Benefits of Overnight Funds
Zero Interest Rate Risk
Complete elimination of interest rate risk due to 1-day maturity, providing maximum capital safety and stability.
Highest Liquidity
Highest liquidity among all debt funds, with funds typically accessible the next business day (T+1).
Lowest Risk
Lowest risk among all debt funds, with minimal credit risk and zero interest rate risk, ensuring capital safety.
Tax Efficiency
Long-term capital gains (3+ years) taxed at 20% with indexation benefit, which can significantly reduce tax liability.
Risks and Considerations
Minimal Credit Risk
While minimal, overnight funds are still subject to credit risk if underlying instruments default. However, funds typically invest in highly rated instruments.
Lower Returns
Returns (3.5-5%) are similar to or slightly lower than liquid funds. For slightly longer periods, liquid funds may provide better returns.
Returns Not Guaranteed
Returns are market-linked and depend on overnight money market rates, which can fluctuate daily based on market conditions.
Limited Use Case
Best suited for true overnight parking needs. For slightly longer periods (even a few days), liquid funds may provide better returns.
Who Should Invest in Overnight Funds?
Overnight Parking
Ideal for investors who need to park funds for just one day or very short periods, such as corporate treasuries managing daily cash flows.
Maximum Safety Seekers
For investors who want to avoid any interest rate risk completely and prioritize capital safety and immediate liquidity over returns.
Corporate Treasuries
Perfect for corporate treasuries managing daily cash flows, where funds need to be accessible the next day with maximum safety.
Immediate Liquidity Needs
For investors who need funds accessible immediately the next day, prioritizing liquidity and safety over returns.
Final Thoughts
Overnight Funds offer the highest liquidity and lowest risk among all debt funds, with zero interest rate risk due to 1-day maturity. They are ideal for parking funds for just one day or very short periods, such as corporate treasuries managing daily cash flows or individuals who need funds accessible the next day. The returns (3.5-5%) are similar to or slightly lower than liquid funds, but the key advantage is the complete elimination of interest rate risk and highest liquidity. However, for slightly longer periods (even a few days), liquid funds or ultra short funds may provide better returns with minimal additional risk. Overnight funds are best suited for true overnight parking needs where the primary concern is capital safety and immediate liquidity rather than returns.