Exploring the world of overnight funds: Gateway to low-risk with better liquidity investing

Equities and similar investments have always been liked because they can make more money compared to other options. However, debt funds have their charm too because they combine safety and stability, which can be a good addition to your investment mix.

Among the various types of debt funds, overnight funds emerge as a prime choice for inclusion in your investment portfolio, especially if you are embarking on your mutual fund journey. Now, let’s delve deeper into the intricacies of overnight funds.

Five Features of Overnight Funds 

Low Risk: Overnight funds are characterized by low risk, primarily due to their investments in debt and money market securities with extremely short maturity periods. This keeps them insulated from high credit risk, interest rate risk, and default risk.

High Liquidity: An attractive feature of overnight funds is their high liquidity. With no lock-in period, you have the flexibility to redeem your investment at any time, and the proceeds are typically credited to your account within a business day.

Reasonable Returns: While overnight funds may not provide sky-high returns, they offer a balance between low risk and reasonable returns, making them a prudent choice for investors seeking a conservative yet fruitful investment.

Low Cost: Thanks to the passive management required for debt holdings, overnight funds tend to have lower expense ratios compared to other mutual funds. It’s always advisable to review the scheme information documents for specific details.

Flexible Holding Period: As open-ended schemes, overnight funds allow investors to enter and exit at their discretion. You can hold your investment for as long as your financial goals require, providing a level of flexibility that many investors appreciate.

Five best performing Overnight Funds: 

The Mahindra Manulife Overnight Fund is managed by Mahindra Manulife Investment Management Private Limited and the fund’s portfolio is allocated with 0.35% in debt, which is lower than the category average of 2.82%. The primary composition consists of 99.65% in overnight securities, with 97.55% in Reverse Repo instruments and 2.02% in TREPS (Tri-Party Repo). The fund’s primary objective is to achieve returns that align with low risk while maintaining a high level of liquidity. This is achieved by primarily investing in overnight securities with a maturity of one business day, including TREPS and Reverse Repo. The fund is managed by Rahul Pel and Amit Garg. Additionally, the expense ratio, as per the latest update, is 0.19%, slightly higher than the category average of 0.17%. The fund has a Yield to Maturity (YTM) of 6.91%.

TRUSTMF Overnight Fund is owned and managed by Trust Asset Management Private Limited. The primary goal of the scheme is to achieve reasonable returns in line with overnight call rates and ensure a high level of liquidity by investing in overnight securities with maturity or unexpired maturity of one business day. The fund is managed by Anand Nevatia and was launched on January 19, 2022. The expense ratio, as of September 30, 2023, stands at 0.12%, which is lower than the category average of 0.17%. The portfolio primarily consists of 99.91% in TREPS. The fund has a Yield to Maturity of 6.88%.

DSP Overnight Fund is owned and managed by DSP Investment Managers Private Limited. Its primary aim is to generate returns that align with low risk and maintain a high level of liquidity. This is accomplished by primarily investing in overnight securities with a maturity of one business day. The fund is overseen by fund manager Kedar Karnik and was launched on January 9, 2019. The expense ratio is 0.14%.

The fund’s portfolio consists of 4.19% allocated to debt, which surpasses the category average of 2.82%. The remaining 95.81% of the portfolio is invested in overnight securities, predominantly in TREPS. Presently, the fund boasts a Yield to Maturity of 6.87%.

Bank of India Overnight Fund is owned and managed by Bank of India Investment Managers Private Limited. Its primary objective is to generate income that aligns with low risk and high liquidity by investing in overnight securities with a residual maturity of one business day. The fund is overseen by fund manager Mithraem Bharucha and was launched on January 28, 2020. The expense ratio for this fund is 0.1%.

When examining the fund’s portfolio, it’s evident that a significant 99.41% is allocated to Repo Instruments. This substantial allocation indicates a strong focus on these instruments within the fund’s investment strategy. The fund has a Yield to Maturity of 6.86%.

The Union Overnight Fund is under the management of Union Asset Management Company Private Limited. The scheme’s primary aim is to generate returns by investing in Debt and Money Market Instruments with overnight maturity. The fund is jointly managed by Tarun Singh and Devesh Thacker and was launched on March 27, 2019. The expense ratio for this fund is 0.18%.

The portfolio of the fund is divided with 1.73% allocated to debt instruments like T-bills, while the substantial majority, accounting for 98.27%, is invested in instruments such as TREPS.

When to Invest 

If you are considering investing in overnight funds, you might be wondering, “When is the right time to invest in an overnight fund?” The answer is simple – you can invest in an overnight fund as soon as you feel ready and have surplus funds to invest. While you may need to consider market conditions for investments in equity funds or other long-term options, you can start investing in an overnight fund at any time.

Since the underlying securities mature the very next day, your investment carries a minimal risk of default, interest rate fluctuation, or credit issues. Moreover, overnight funds do not impose a lock-in period, granting you the freedom to redeem your investment at any time.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.