What is Best Overnight Mutual Funds in India and their Returns

Several investors have started investing in overnight funds, considering their investor-friendly features and benefits. As per SEBI (Securities and Exchange Board of India), these are open-ended debt funds with a maturity period of one day. With these funds, you can invest in overnight securities and assets.

Interests keep on adding to the fund overnight and fund managers keep on investing your funds in new overnight securities. Keep reading to know more about an overnight mutual fund.

What Are the Objectives of Overnight Mutual Funds?

With overnight funds, you can best utilize your idle cash and earn returns by investing them overnight. These funds aim at making you earn extra from the cash you have left in your account. Take a look at the following objectives of overnight funds:

• Low Expense Ratio: Overnight funds come with an expense ratio of less than 1%. As the investment in these funds is not managed actively, the costs involved are usually less as compared to other mutual funds. Resultantly, you can make higher profits at lower prices.
• High Liquidity: Overnight funds are highly liquid in nature. Unlike other mutual funds, you can invest in overnight funds and redeem your money within trading hours. 
• Short Investment Horizon: Considering their shortest maturity period of a single day, overnight funds come with a short investment horizon. With overnight mutual funds, you can efficiently utilize the extra funds available at your disposal.
• Low Risk: Considering their short investment horizon, these funds are not exposed to high risk like other mutual fund investments. As your invested amount gets instantly matured and gets invested in new overnight security, there are extremely low risks of defaulting.

How Are Overnight Mutual Funds Beneficial for You?

If you are among the risk-averse investors, overnight mutual funds can be a perfect investment option. It is an ideal short-term investment plan with almost the lowest risk profile. Here are some more benefits of these mutual funds that may be advantageous to you in many ways:

Unaffected by Market Volatility Overnight funds come with a trading period of one day. So, the changes in interest rates as imposed by the RBI cannot affect them. Instead, the short investment horizon protects it from market volatility like credit risks, uncertainty against liquidity, etc.

• Free from Hefty Penalties

Other safe investment options like fixed deposits charge a penalty for premature withdrawal of the invested amount. However, penalties are not applicable for overnight funds as they are featured for short-term investments.

• Best Returns During Market Crisis

These funds can bring you great returns even during a market crisis or uncertainty. Once again, a short investment horizon backs up overnight mutual funds investors.

• Maximum Utilisation of Idle Money

Idle cash does not bring you any profit but keeps you concerned about their safety if kept at home. So, you can invest them in overnight funds, and rest assured they are safe and will provide you with higher returns than a savings account.

• Helps in Emergencies

Considering their high liquidity, these funds can be liquidated immediately at times of emergencies. So, you can efficiently use overnight funds to earn profit and back up your emergencies.

• Low Risk Involved

Overnight funds come with almost a 0% chance of getting defaulted. This is because they invest in one-day maturity securities with the lowest risk factor. 

How Does an Overnight Mutual Fund Work?

Overnight mutual funds come with a one-day maturity period. These funds invest in reverse repos, CBLOs (Collateralised Borrowing and Lending Obligation), or other debt securities for one day. As per SEBI's regulation, these funds cannot invest in any security for a maturity period of more than a day. Consequently, the risks involved in these investment options are almost nil.

As the name suggests, overnight funds mature over the night and are replaced with new security. These new securities also come with a maturity span of one day. The assets under management (AUM) of these funds remain in form of cash at the start of the day. 

Considering their overnight liquidity, these funds are considered cash equivalents by the corporates. Once these funds mature the fund managers invest them into new overnight securities. With the interest earned from the existing securities, AUM increases each day. Thus, overnight funds bring you income through interest payments. 

The overnight borrowing and lending rates can affect the returns you can earn from overnight funds. These funds remain highly liquid when the interest rate falls leading to a reduced overnight rate. However, in case of increased rates, the liquidity remains low. 

What Are the Taxation on Overnight Mutual Funds?

The holding period plays a major role in determining the taxation on overnight funds. Thus, it is the same as debt mutual funds. So, here are the two types of taxation levied on overnight funds:

• Long-Term Capital Gains Tax

Long-term capital gains are when the holding period for the capital gain on the investment is more than three years. If you intend to sell your funds before completing this three-year term, you need to pay a tax of 20% for funds with indexation. However, in the case of funds without indexation, only a 10% tax is charged.

• Short-Term Capital Gains Tax

When the holding period for capital gain on an investment is less than three years, it is termed short-term capital gain. Taxation on these gains depends on your income tax slab rate.

Final Takeaway

Now that you know what is an overnight mutual fund, you can proceed forward with investing here. However, if you are still in doubt, ensure solving them in the first place and proceed accordingly. Mutual funds are highly volatile, so before you invest in any of its products, acquire detailed knowledge on the same.