Table of Contents
Introduction
Overnight Funds focus on short-term debt securities with a maturity of only one day, offering investors minimal credit risk alongside stability, predictability, and consistent income generation. Here, we’ll discuss their key features, who they might be suitable for, and what to consider before investing. Learn how these funds can provide significant returns, helping you build a strong investment strategy.
What are Overnight Funds?
Overnight funds are open-ended debt funds introduced in SEBI’s 2018 mutual fund reclassification exercise. They offer a low-risk option with next-day liquidity, investing in assets maturing in one day, like overnight reverse repos and CBLOs. This short maturity ensures minimal credit risk. Investors can easily transact during trading hours, and fund managers reinvest the cash into overnight securities to maintain liquidity and stability.
How do Overnight Funds work?
Overnight funds invest in ultra-short-term debt instruments like Treasury bills, commercial papers, and certificates of deposit that mature in one day or less. Fund managers continuously reinvest in these securities to maintain liquidity, allowing investors to buy or sell shares any business day.
The primary goal is capital preservation with a bit of extra income from high-quality, low-risk debt instruments. Returns mainly come from interest earned on these securities, and some funds distribute dividends regularly.
Features of Overnight Funds
Short-Term Investments: Invest in debt securities with a one-day maturity, offering low credit risk and high liquidity.
Low Interest Rate Sensitivity: Less sensitive to interest rate changes, reducing NAV fluctuations.
High Liquidity: Easy to buy or sell units on any business day, with quick access to funds.
Capital Preservation: Focus on protecting the principal amount invested.
Regular Dividends: May provide income from interest earned on short-term securities.
No Entry or Exit Load: Cost-effective with no additional fees.
Stability and Predictability: Offer stable NAVs and predictable returns.
Regulatory Compliance: Adhere to SEBI guidelines for transparency and risk management.
Risks and Returns
Before investing in Overnight Funds, it’s important to understand both the potential benefits and drawbacks:
Returns
Stability and Capital Preservation: Aim for stable and predictable returns, suitable for low-risk investors.
Liquidity and Accessibility: Offer quick access to funds with redemption proceeds available within one business day.
Consistent Income Generation: Generate income through interest earned on short-term securities, ideal for short-term cash management.
Risk Mitigation: Invest in high-quality, short-term debt instruments and maintain a diversified portfolio.
Risks
Low Returns: Generally offer lower returns compared to other mutual funds.
Interest Rate Risk: Minimal but present, changes in interest rates can impact returns.
Credit Risk: Small risk of default by issuers, despite high-quality debt instruments.
Liquidity Risk: Market constraints may affect the fund’s ability to meet redemption requests promptly.
Market Risk: Subject to general market risk, though relatively low compared to other funds.
Conclusion
Overnight funds present a dependable low-risk investment opportunity characterised by high liquidity and capital preservation. With their focus on short-term debt instruments, these funds offer stability and predictability to investors, making them an ideal choice for those emphasising safety and consistent income generation.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.