Sharekhan Blog

What is Overnight Funds?

  • Apr 1, 2024

An overnight mutual fund invests in extremely short-term securities that mature the next day. It is a debt-oriented mutual fund scheme.

We shall learn about overnight fund means, their goals, and their benefits in this blog. In addition, we'll examine how it operates and what to think about before purchasing these funds.

Overnight Fund Meaning

Overnight funding meaning is open-ended debt funds specialising in overnight securities or assets with a one-day residual maturity are known as overnight funds. The Asset Under Management (AUM) is held in cash at the beginning of each business day. Later, the fund manager makes investments in overnight bonds that mature the following business day. The cycle continues as fund managers typically utilise the cash amount to buy more bonds overnight.

12:30 PM is the deadline for applying Net Asset Value (NAV) to the acquisition of units in the India Overnight Fund. The Securities and Exchange Board of India, or SEBI, has changed the times for the redemption of overnight funds to 1 PM.

Objectives of Overnight Funds

The goal of overnight funds is to provide investors with the best possible option to spend their cash reserves and make money. The most important qualities of overnight funding that enable it to fulfil its mission are listed below.

1. Brief investment period: The overnight funds have a one-night maturity. Investors are able to make better use of their financial reserves because of the short investment term.

2.Low-risk: The fund's exposure to risks resulting from market fluctuations in interest rates is limited by its shorter maturity period and short investment horizon.

3.High liquidity: The most liquid investment option is represented by these funds, which enable investors to make profitable use of excess corpus.

Advantages of Overnight Funds

The following are the benefits of overnight funds: -

1. Liquidity ease: Since overnight funds don't have entry or exit loads, their liquidity is very high. This implies that without sacrificing the initial investment, investors can simply withdraw their money from their assets in an emergency.

2. Improved utilisation of excess money: For investors looking to maximise returns with the least amount of risk, overnight funds represent a great investment choice. Overnight funds, in contrast to most typical savings choices, allow investors to realise rewards in a shorter period.

3. Less-risky: For investors with a low tolerance for risk, overnight funds are the best option because of their low-risk component. Furthermore, it benefits investors who have a conservative attitude toward investing.

4. Safety against market volatility: Overnight mutual funds are mostly unaffected by changes in the Reserve Bank of India's (RBI) interest rate policy or shifts in borrower credit ratings. They try to protect investors from market volatility and mitigate risks such as credit risk and uncertainty about liquidity through their short investment horizon.

5. Low cost: Because their debt holdings are passively managed, overnight mutual funds are inexpensive debt mutual funds.Click Here to Invest in Mutual Funds!

How do Overnight Funds Work?

Similar to what we just covered, overnight funds make investments in overnight securities that mature the next day. In other words, fund managers invest their capital in these securities, and the cash proceeds from their redemption the following day are utilised to buy more securities. And every day, this process keeps going.

The interest that these funds receive from their debt holdings is how they generate revenue. The plan and its investors have no chance of making any capital gains in the future because it solely invests in debt instruments.

Let's examine these funds' taxation now so that we have a better understanding of how they operate.

Overnight fund taxation is comparable to those of other debt mutual fund schemes. Any kind of capital gain, whether short-term or long-term, is subject to taxation based on your income tax slab under the new tax laws. This is applicable to investments made on April 1, 2023, or later.

For both kinds of gains, there are differences in taxation if you invested before April 1, 2023.

Short-term capital gains: The realised gain is referred to as short-term capital gains if you redeem your investment within three years. Additionally, this gain is taxed according to your income tax bracket and applied to your total income.

Long-term capital gains: The earned profit is considered long-term if you redeem your investment three years later. With indexation benefits, this gain is subject to a 20% tax rate. Remember that only investments made before April 1, 2023, are eligible for this indexation advantage.

The Bottom Line

For investors' short-term investment needs, overnight funds offer a low-risk, highly liquid alternative. These funds protect investors' money while providing respectable returns because of attributes including stability, diversification, and expert management. To make an informed choice based on your financial goals and risk tolerance, you must, however, thoroughly study and comprehend these funds before investing.

Team Sharekhan
by Team Sharekhan

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