Best Overnight Funds
About Overnight Mutual Funds
Overnight funds are basically open-ended debt mutual funds that earn returns by lending their money to corporates for one business day only (through overnight securities). The corporates that borrow through this route are mostly banks, insurance companies, mutual funds, provident funds, and other NBFCs.
Investors who deploy their money in overnight funds place a purchase and redemption request for their choice of fund during trading hours. The bonds are purchased overnight and mature by the following business day. The overnight funds’ returns are then used to buy more such bonds overnight, and the cycle goes on.
How Do Overnight Funds Work?
Overnight funds are designed to allocate your capital into various short-term debt instruments, each with a one-day maturity period, in compliance with SEBI regulations. These funds adhere strictly to the guideline that restricts investments in financial instruments with a maturity period exceeding a single day.
The composition of an overnight fund’s holdings undergoes daily transformations as the underlying securities mature on a daily basis. Consequently, as these securities reach maturity overnight, the fund manager replaces them with fresh overnight securities. This periodic replacement ensures that the fund’s portfolio remains aligned with the one-day maturity mandate. Additionally, the fund’s Assets Under Management (AUM) experience incremental growth due to interest payments generated by these securities.
Features of Overnight Funds
The following are some of the characteristic features of overnight funds –
- Short term returns – Since the debt instruments mature overnight, the returns are realised very quickly – this is in stark contrast to equity funds, which buy and hold stocks for months and years. This gives fund managers the opportunity to make changes to their investment strategy at very short intervals. But it may also slightly increase the effort required to operate the fund.
- Low risk – Since the returns are realised daily and the instruments are debt papers with collaterals, the level of risk associated is much lower. Any mistakes are suffered only briefly as problems that arise with respect to credit risk are responded to and resolved in a matter of days. Moreover, their impact is much lower on the overall monthly or yearly returns of the fund.
- High liquidity – Since the debt instruments are maturing fast, the fund itself is fine with the investor trading their fund units as and when the latter wishes to.
Advantages of Investing in Overnight Funds
The following are some of the advantages of investing in overnight funds –
- Better usage of idle funds – Investments in overnight funds may give slightly higher returns than savings deposits, even though their level of risk is quite low and liquidity is high. Therefore, they may be a better parking spot for your idle funds.
- Low risk – Because of factors mentioned earlier, such as liquidity, concentration in debt investments, etc., overnight funds are considered a safer investment than many other investment options.
- Lower impact of RBI rate changes – Usually, debt funds may lose money if the RBI increases the rate of interest too high (as their debt investments may lose value). However, because overnight instruments are less affected by such changes in rates (due to their ultra-low holding period) while enjoying low credit risks as well, they can act as a buffer against market volatility for debt fund investors.
- Lower expense ratio – Many of the overnight funds come with an expense ratio much lower than 1%. This is because these debt investments are often passively managed.
Risks Involved in Overnight Funds
The only risks in overnight funds are credit risk and interest rate risk.
Credit risk is the risk that the credit extended by the fund is not repaid on time by the debtors. However, since the debt instruments mature overnight, that risk is also quite low.
Interest rate risk is the risk of negative impact due to changes in interest rates in the market. However, since the instruments mature overnight, there is no risk of any massive changes or differences in interest rates. Therefore, interest rate risk is also negligible.
Overall, the risk involved in investing in overnight mutual funds is really low. The only disadvantage that it has is the fact that it gives lower returns than equity funds. This is because the funds invest in low-risk investments, and thus, the returns that they produce are low as well.
Factors To Consider Before Investing in Overnight Funds
- Safety First: Overnight funds prioritise safety and liquidity over high returns, making them an ideal choice for risk-averse investors.
- Savings Account Alternative: Think of overnight funds as a secure alternative to a savings account, with the added benefit of potential slightly higher returns.
- Variation in Returns: There’s variability in returns and expense ratios among different overnight funds, so research and choose those with a consistent track record of performance and low costs.
- Align with Goals: Your investment in overnight funds should align with your financial goals and strategy.
- Diversify Wisely: While it’s a good idea to allocate some funds to overnight funds for safety, don’t shift entirely if your investment horizon is longer; consider other options like liquid or ultra-short duration funds for potentially higher returns.
Who Should Invest in Overnight Funds?
As we can see above, overnight funds give moderate returns with low-risk. Therefore, the following are the people who should definitely consider investing in overnight funds –
- Investors with a very short investment timeline
Investors with a short-term investment horizon of one week or less would like overnight funds as they can redeem after holding the units for even one day. This degree of flexibility gives overnight funds an edge over liquid funds, as the latter charge an exit load for redemptions within 7 days (as instructed by SEBI). - Investors looking for temporary parking of funds
Overnight funds are both safe as well as highly liquid. Hence, investors may use such funds to park their money while periodically investing those funds in avenues that may give a higher return, such as equity funds. This gives the investor the opportunity to invest in high-risk funds over time while earning moderate returns simultaneously.
Taxability of Overnight Funds
There are two sources of income for an investor in overnight mutual funds – dividend income and capital gains.
Dividend taxation – The dividends received are added to the taxable income and are taxed as per the income bracket of the investor. In addition to this, there is a 10% TDS on dividend amount exceeding ₹5,000 in a financial year.
Capital gains taxation – The following are the taxes applicable to capital gains.
- Short-term Capital Gains Tax – Investments sold within 3 years of investment are short term and gains from them are taxed as per the income tax slab of the investor.
- Long-term Capital Gains Tax – If the investor sells the units of an overnight fund after holding it for more than 3 years, it is considered a long-term investment. In such cases, the investor may avail the benefit of indexation. This means that the purchase price figure (used to calculate the percentage returns) is increased to adjust for inflation (using an index provided by the Government). Consequently, the taxable amount is reduced. Overall, long-term capital gains on debt fund returns are currently taxed at a lower rate of 20%.
How to Invest in Overnight Funds?
Investing in Overnight Funds is made easy through your Angel One account. Simply follow these steps:
Step 1: Log in to your Angel One account using your registered mobile number, validate the OTP, and enter your MPIN.
Note: If you don’t have a Demat account with Angel One, you can swiftly open one by completing the KYC process and submitting the necessary documents.
Step 2: Choose the fund that aligns with your needs and risk tolerance. You can assess each fund in the mutual fund section on the Angel One app. Consider the following factors at this stage:
- Search for your desired fund or take recommendations from funds listed by Angel One across different categories.
- Analyse the fund’s historical performance, tax implications, constituent sectors, and underlying stocks.
- Use the calculator to estimate potential returns.
- Assess the fund’s risk level and compare it to your risk tolerance.
- Examine the fund’s ratings provided by respected rating agencies, typically ranging from 1 to 5.
- Take into account the fund’s expense ratio to gauge the cost of your investment.
Step 3: Once you’ve decided on the fund(s) you wish to invest in, access your Angel One account, navigate to the Mutual Funds section, and locate your chosen fund. Since this can be a long-term investment, exercise caution during fund selection. At this point, consider the following:
- Decide whether you want to make a lump-sum investment or opt for a monthly SIP.
- Specify the amount you wish to invest and choose your preferred payment method, with UPI being the recommended choice. Alternatively, you can opt for net banking.
- For SIP investments, you can set up a mandate for hassle-free future instalments after placing the initial order.
Top 5 Overnight Funds to Invest in
| Fund Name | AUM ( in ₹ crores) | Expense Ratio (%) | CAGR 3Y (%) | CAGR 5Y (%) |
| Mahindra Manulife Overnight Fund(DD-IDCW) | 300.68 | 0.09 | 8.61 | 5.48 |
| Mirae Asset Overnight Fund | 1,005.84 | 0.08 | 6.09 | 5 |
| PGIM India Overnight Fund | 102.82 | 0.1 | 6.05 | 4.98 |
| DSP Overnight Fund | 2,614.05 | 0.06 | 6.07 | 4.98 |
| HSBC Overnight Fund | 3,162.25 | 0.06 | 6.08 | 4.98 |
Note: The above-mentioned funds are for informational purposes only and are not recommendations. The funds are based on 5-Year CAGR as of January 8, 2025, which are subject to change frequently. Check out real-time data on Angel One.
Mahindra Manulife Overnight Fund(DD-IDCW)
This fund offers a cost-effective solution with an expense ratio of 0.09%, making it appealing for investors seeking low operational costs. It provides a yield to maturity of 6.71%, showcasing competitive returns in the overnight fund category. The Sharpe ratio of 40.18 highlights its excellent risk-adjusted performance. Managed by Mahindra Asset Management Company, this fund benefits from the legacy and reliability associated with the Mahindra group, offering investors both trust and value.
Mirae Asset Overnight Fund
Mirae Asset Overnight Fund delivers value with its low expense ratio of 0.08%, making it one of the more economical options in its category. The fund achieves a yield to maturity of 6.67% and an impressive Sharpe ratio of 43.43, indicating effective management of risk and return. With no lock-in period or exit load, it prioritises flexibility and accessibility. Backed by Mirae Asset Financial Group’s global presence and expertise, this fund can be a reliable choice for those seeking stable overnight returns.
PGIM India Overnight Fund
The PGIM India Overnight Fund strikes a balance between cost and performance, featuring an expense ratio of 0.10% and a yield to maturity of 6.67%. Its Sharpe ratio of 20.07 reflects balanced risk-adjusted returns, aligning with industry standards. This fund is accessible with a minimum investment of ₹5,000 and does not impose an exit load, ensuring liquidity. With the global experience of PGIM India, the fund caters to short-term investors looking for efficient and secure returns.
DSP Overnight Fund
With a low expense ratio of 0.06%, the DSP Overnight Fund is designed for cost-conscious investors. It offers a yield to maturity of 6.68%, providing stable returns while maintaining a Sharpe ratio of 8.95. This fund requires no lock-in period or exit load, enhancing its appeal to those seeking flexibility. Managed by DSP Investment Managers, which has a longstanding reputation in Indian financial markets, the fund offers security and reliability for overnight investments.
HSBC Overnight Fund
The HSBC Overnight Fund stands out for its affordability, offering an expense ratio of 0.06%. It delivers a yield to maturity of 6.65% and a Sharpe ratio of 38.30, reflecting effective management of risk and performance. With a minimum investment requirement of ₹5,000, this fund is accessible to a wide range of investors. Backed by HSBC’s extensive network and expertise, it provides liquidity and steady returns without any lock-in or exit load.
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