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Best Overnight Mutual Funds (2023): Sleep Tight, Invest Right

Overnight mutual funds

Following liquid plans, corporate bond plans, short-duration funds, and low-duration funds, overnight mutual funds rank fifth in popularity among debt funds. The assets under management (AUM) of debt open-ended plans are covered by these funds to the tune of approximately 8%.

What are Overnight Mutual Funds?

Overnight funds are open-ended debt funds that invest in overnight assets with a one-day maturity date, according to SEBI. It’s a very liquid debt fund of its own. In order to choose overnight funds during business hours, investors who would like to invest in such funds submit a buy and retrieval request.

The AUM of these funds is cash at the beginning of every trading day. The securities are purchased overnight and mature the next business day. Overnight, a fund manager receives the necessary funds to buy further instruments of this kind, and so the cycle continues.

Features of Overnight Funds 

The following are the attributes of overnight funds:

  1. Short-term Investment: These plans develop quickly. Investors can make efficient use of their extra money because of this limited time horizon.
  2. Highly Liquid: These investment vehicles are thought to be the most liquid. It facilitates investors’ timely and effective fund access.
  3. Low Risk: A quick maturity and a brief investment horizon significantly reduce risk.

How do Overnight Mutual Funds Work?

Understanding their investment portfolio and revenue streams is essential to comprehending how overnight funds operate.

Where do Overnight Funds Invest: Mutual funds that invest overnight make precise debt investments in accordance with strict SEBI regulations.  These consist of different debt and money market products, including reverse repos, and collateralized borrowing and lending options (CBLO). New overnight assets replace the debt instruments in a fund’s portfolio every day. Fund managers make investments in financial instruments with extremely low default rates.

Earnings: Interest on overnight debt instruments is the only source of income for overnight mutual funds. Assets have little chance of yielding financial gains because they mature in a single day. Borrowing rates have an impact on interest rates. The overnight borrowing rate decreases in response to a decrease in interest rates and an abundance of short-term liquidity in the market, and vice versa.

Advantages of Overnight Mutual Funds  

  1. Quick returns: These funds are good options for investors looking to use their excess cash to make more money with the least amount of risk. In contrast to the majority of fixed deposits and bank deposits with long maturities, these schemes allow investors to make profits quickly.
  2. Safe investment: These funds are not affected significantly by changes in the interest rates set by the RBI or variations in the credit ratings of the borrowers. Investors are safeguarded from swings in interest rates, credit risk, and liquidity by the schemes’ short lengths. Additionally, investors are protected against market volatility by overnight mutual funds.
  3. No exit load: These funds are more liquid because they don’t have an exit load. In times of emergency, investors can liquidate their investments without losing their capital.

How to Choose the Best Overnight Fund

Selecting a mutual fund for overnight investing, or any mutual fund, should be based on your investment objectives, time horizon, and risk tolerance. Even if certain funds are thought to be less hazardous than others, market risk can still affect mutual funds, so you should be aware of that. Thus, research a fund’s past performance, expense ratio, historical returns, and other factors before selecting one. To gain more insight into which fund to invest in, try to speak with an experienced investor or fund advisor.

How to Invest in Overnight Mutual Funds in 3 Steps?

  1. Making a Direct or Regular Plan Investment in an Overnight Fund.

To invest via a direct plan, follow these steps:

Step 1: Visit the AMC’s branch office or website. Investing via a mobile application is another feature offered by certain fund providers.

Step 2: You must fill out the application and finish the KYC requirements, either offline or online. 

Step 3: The next step is to select the mutual fund scheme and fund that specific scheme by transferring the necessary amount from your bank account.


  1. Online investment platforms and mobile applications for investing in mutual funds

The following procedures outline how to invest in an overnight mutual fund using a regular plan:

Step 1: Reach out to the broker or intermediary providing overnight mutual fund schemes.

Step 2: Online or offline, finish the KYC procedures and upload the necessary files.

Step 3: Investors then need to select the overnight mutual fund plan and send a check or use any electronic payment option to send the investment amount. The purchase of the mutual fund units has been completed successfully.

Overnight Mutual Fund Tax Implications

Overnight mutual funds are subject to the same taxes as debt schemes. The following are the tax proceeds:

  • Long-term capital gain taxes are applied to investments made in scheme units that are held for more than 36 months. These funds are subject to a 20% tax rate following indexation adjustments. By using the cost inflation index, indexation raises the purchasing price of the fund. 
  • A short-term capital gain is realized on an investment when units are kept for up to 36 months. These gains are included in an investor’s net income tax return. The tax is determined by the individual’s income bracket.

Things to Consider Before Investing in Overnight Mutual Funds

When making an overnight mutual funds investment, investors need to consider the following:

  1. Returns: Before using overnight funds, people need to think about the return component. They are a safe option for debt investments, but they don’t offer big returns. The markets offer a wide variety of fund schemes, so it’s important to select an overnight fund that regularly yields respectable returns.
  2. Investment Goals: Picking an overnight mutual fund requires people to take their investing objectives into account. Such schemes’ investment objectives and risk profiles ought to match their financial objectives.
  3. Expense Ratio: The expense ratios charged by various fund houses for the mutual fund schemes they offer differ. A careful comparison of the expense ratios of various overnight funds is necessary for investors to select the one with the lowest expense ratio.
  4. Fund Manager’s Performance: Fund managers professionally oversee all of the mutual funds. The success of the overnight mutual funds is impacted by every choice made by the fund manager. Therefore, it is crucial that investors select a scheme run by a fund manager with a solid track record.
  5. Risk Appetite: The products in which overnight funds invest are quite dependable and have little likelihood of default, making them comparatively safe investment possibilities. Investors who are risk cautious should consider it as a suitable alternative. Still, it might not be a viable choice for risk-taking investors looking for greater returns.

Final Word

One should be aware of how overnight mutual funds operate in different circumstances before making an investment. Knowing the risk-return characteristics of mutual funds clearly, investors will be aware of what to anticipate from this particular type of specialist debt fund.

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