Overnight Funds
Overnight funds are open-ended debt mutual fund schemes that invest in securities with a maturity of one business day. Portfolios in this category do not hold commercial paper or certificates of deposit maturing in a single day, as money market regulations require longer minimum tenures. The segment also no longer uses Collateralized Borrowing and Lending Obligations, which clearing corporations phased out in November 2018. This content explains the permitted repo holdings, the revised online cut-off timings, and current debt taxation under the Income-tax Act 2025.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We are not registered investment advisers. This page names no scheme and no fund house. The choice is yours.
Asset maturity: Debt and money market instruments maturing on the next business day
Permitted holdings: Tri-Party Repos (TREPS) and market repurchase agreements backed by sovereign collateral
Purchase pricing rule: Applications processed with funds realized before 1.30 p.m. receive the previous business day’s closing NAV
Redemption pricing rule: Online redemptions submitted before 7.00 p.m. receive the current business day’s closing NAV
Exit charges: Nil exit load across all holding tenures as universal industry practice
Tax framework: Taxed as short-term capital gains at slab rates under Section 199 of the Income-tax Act 2025 for units acquired on or after 1 April 2023
SEBI definition and regulatory classification for overnight funds
Market regulations define overnight funds as open-ended debt schemes that invest exclusively in instruments with a single-day maturity. Schemes categorized under this regulatory framework deploy capital into securities that mature on the next business day. Asset management companies must align their portfolios with this requirement every business day.
The Securities and Exchange Board of India (SEBI) governs this category under the SEBI (Mutual Funds) Regulations 2026, which replaced the 1996 framework on 1 April 2026. The regulations mandate that an overnight scheme must invest 100 percent of its total assets in securities that mature within one business day.
This mandate makes the category distinct from other debt portfolios:
Daily Portfolio Turnover: Every security held in the portfolio matures on the next business day.
No Medium-Term Holdings: The scheme cannot purchase securities that mature in two or more business days.
Single Category Universe: The Association of Mutual Funds in India (AMFI) tracks schemes to ensure all fund houses operate under identical portfolio maturity limits.
In standard debt funds, securities mature across months or years. In an overnight portfolio, the entire investment value converts into cash every business morning. The fund manager deploys that cash into fresh single-day instruments before market hours conclude.
Permitted money market instruments and clearing workflows
Portfolio holdings in this category consist primarily of Tri-Party Repos and bilateral market repurchase agreements backed by sovereign collateral. Money market instruments like commercial paper and certificates of deposit do not issue at one-day tenures. Clearing operations run through centralized clearing platforms to ensure orderly daily settlement.
Many financial portals assert that overnight portfolios hold commercial paper (CP), certificates of deposit (CD), and treasury bills that mature in one day. That claim conflicts with statutory money market directions:
Commercial Paper Rules: Master Directions issued by the Reserve Bank of India (RBI) mandate that commercial paper must carry a minimum maturity of seven days. Primary issuance of one-day commercial paper is prohibited.
Certificate of Deposit Rules: The Reserve Bank of India mandates that certificates of deposit issued by banks must have a minimum tenure of seven days.
Treasury Bill Issuance: The Government of India issues treasury bills with minimum tenures of 91 days.
Because primary debt paper does not exist at single-day tenures, these portfolios deploy cash through collateralized repurchase markets:
1. Tri-Party Repo (TREPS)
The Clearing Corporation of India Limited (CCIL) introduced Tri-Party Repo in November 2018 to replace the older Collateralized Borrowing and Lending Obligation (CBLO) facility. In a TREPS transaction, CCIL acts as the central counterparty between the borrowing institution and the lending fund. Borrowers pledge central government securities as collateral. CCIL guarantees settlement, manages margin requirements, and conducts daily clearing.
2. Market Repos
Mutual funds execute bilateral repurchase agreements on recognized market platforms with eligible market participants. The fund lends cash overnight against central government securities or treasury bills. The borrowing counterparty repurchases those securities the following business day at an agreed rate that includes interest.
Under central bank operating frameworks, mutual funds are not eligible counterparties for direct Reserve Bank of India liquidity adjustment facility (LAF) reverse repo or Standing Deposit Facility (SDF) operations. Those facilities are reserved for scheduled commercial banks and primary dealers. Mutual funds deploy liquidity through the interbank repo and TREPS markets.
Cut-off timings and the historical NAV pricing framework
Transaction timing rules establish an earlier purchase cut-off of 1.30 p.m. for overnight funds, requiring available funds in scheme accounts. Qualifying applications receive the historical closing net asset value of the preceding business day, while online redemption requests submitted up to 7.00 p.m. receive same-day closing valuation.
Pricing rules for this category operate under distinct regulatory provisions to facilitate short-term treasury cash management:
SEBI circular dated 22 April 2025 extended the redemption cut-off for online applications in these schemes to 7.00 p.m., while physical redemption submissions remain at 3.00 p.m.
The purchase mechanism functions on historical pricing. If an investor submits an application at 11.00 a.m. on a Tuesday and funds are credited to the scheme’s account before 1.30 p.m., the investor receives Monday’s closing net asset value.
This pricing rule permits capital deployed before Friday’s 1.30 p.m. cut-off to receive Thursday’s NAV. The deployed capital participates in portfolio accruals across Friday, Saturday, and Sunday. When the investor submits an online redemption request before 7.00 p.m. on Monday, the transaction receives Monday’s closing NAV, reflecting three calendar days of portfolio accruals.
This Content on net asset value covers cut-off rules across equity and hybrid fund categories.
Overnight funds compared with liquid funds
Portfolio maturity limits separate overnight funds from liquid schemes across the short-term debt spectrum. Liquid schemes invest in debt paper maturing in up to 91 days and enforce a mandatory seven-day exit load. Overnight schemes restrict investments to single-day paper and maintain zero exit charges for unitholders.
Investors evaluate both categories for short-term liquidity, but their structural parameters address different investment horizons:
| Parameter | Overnight Category | Liquid Category |
|---|---|---|
| Maximum Asset Maturity | 1 business day | Up to 91 calendar days |
| Underlying Assets | TREPS, market repos | Commercial paper, CDs, T-bills, corporate bonds |
| Interest Rate Sensitivity | Lowest among debt categories | Minimal (managed within 91-day limits) |
| Exit Load Schedule | Nil (universal industry practice) | Graded exit load on redemptions during days 1 to 6 |
| Purchase NAV Cut-Off | 1.30 p.m. (historical NAV) | 1.30 p.m. (historical NAV) |
| Online Redemption Cut-Off | 7.00 p.m. | 3.00 p.m. |
Under SEBI circular SEBI/HO/IMD/DF2/CIR/P/2019/101 dated 20 September 2019, liquid funds apply a mandatory graded exit load on redemptions processed within the first six days of allotment:
Day 1: 0.0070%
Day 2: 0.0065%
Day 3: 0.0060%
Day 4: 0.0055%
Day 5: 0.0050%
Day 6: 0.0045%
Day 7 onwards: Nil
Overnight schemes carry no exit load from the date of allotment. If an investor requires capital within two or three business days, these schemes avoid redemption deductions. For holding horizons of several weeks, liquid funds provide access to slightly longer-tenure money market paper.
Market risk factors and repo yield sensitivity
Market interest rate adjustments create reinvestment risk for these portfolios because underlying securities mature on successive business days. Daily turnover minimizes portfolio duration relative to longer-dated debt funds, yet scheme yields fluctuate as interbank money market rates change. Sovereign collateral secures repo lending without eliminating all investment risks.
While these mutual fund schemes operate in the shortest maturity tier of the debt market, they remain subject to market variables:
1. Reinvestment Risk
Because assets mature each business day, fund managers reinvest cash balances continuously at prevailing market repo rates. If interbank liquidity expands or monetary policy rates soften, the yields on fresh overnight paper decline. The fund cannot lock in prevailing yields for longer periods.
2. Collateralized Settlement Structure
Overnight lending in TREPS and market repo platforms requires borrowers to deposit sovereign collateral, primarily central government securities. Clearing corporations enforce regulatory margin haircuts on pledged securities to address price fluctuations. This structure provides settlement protection relative to unsecured lending, though operational, counterparty, and settlement systems remain subject to broad market risks.
3. Yield Fluctuations
Returns in these portfolios fluctuate with daily liquidity conditions in the Indian banking system. When systemic liquidity tightens, interbank repo rates adjust upward. When liquidity is broad, overnight rates soften. These portfolios are designed for operational cash management, not capital growth.
Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.
Exit load practices and regulatory history
Redemption charges do not apply to these portfolios as an established industry practice across Indian asset management companies. Regulations permit fund houses to establish exit loads, but managers maintain nil exit loads to support short-term cash management. Historical regulations banned entry loads across all mutual funds in 2009.
Fee structures in this category reflect a combination of regulatory history and market practice:
Industry Exit Load Practice
Under SEBI’s categorization framework, the regulator does not prescribe a statutory exit load schedule for this category, unlike the mandatory seven-day schedule enforced for liquid funds. However, asset management companies voluntarily maintain a zero exit load policy across all holding durations. Investors can enter on a business day and redeem on the next business day without fee deductions. This nil exit load policy is standard industry practice across all domestic fund houses.
The Entry Load Regulatory Ban
Promotional materials occasionally market these schemes as carrying “no entry load.” Presenting zero entry load as a distinct product advantage ignores industry regulations. SEBI banned entry loads across all mutual fund schemes on 1 August 2009. No mutual fund scheme in India may charge an entry load.
Our page on exit load covers deduction schedules across debt and equity categories.
Corporate treasury workflows and cash deployment use cases
Corporate treasury desks deploy short-term operational balances into these portfolios to earn repo-linked yields over weekends and bank holidays. Commercial entities frequently use these schemes to accumulate cash ahead of quarterly advance tax deadlines, while individual investors occasionally utilize them as source accounts for systematic equity transfers.
These portfolios function primarily as liquidity management tools across distinct investor profiles:
Weekend Liquidity Parking: Commercial organizations often receive customer collections late in the business week. Transferring these balances into an overnight scheme before 1.30 p.m. on Friday allows cash to participate in repo market accruals across Saturday and Sunday. Treasuries can then submit an online redemption request on Monday before the 7.00 p.m. cut-off to fund scheduled operational disbursements.
Advance Tax Remittance Buffers: Corporate entities accumulate funds ahead of statutory quarterly advance tax installments due on the 15th of June, September, December, and March. Holding these balances in overnight paper provides accessibility while avoiding market duration risk.
Systematic Transfer Staging: Individual investors holding lump-sum capital often prefer not to deploy the entire sum into equity markets simultaneously. Investors can hold capital in an overnight scheme while establishing a Systematic Transfer Plan (STP) to shift fixed amounts weekly or monthly into an equity fund.
Our blog on types of mutual funds outlines how overnight and money market categories integrate with broader asset allocation models.
Debt taxation rules under the Income-tax Act 2025
Taxation regulations classify capital gains from these schemes as short-term capital gains under the Income-tax Act 2025. Because these portfolios invest primarily in debt instruments, gains from units acquired on or after 1 April 2023 face taxation at the investor’s applicable income tax slab rate plus cess.
The Income-tax Act 2025 replaced the Income-tax Act 1961 on 1 April 2026. Under Section 198(8) of the Income-tax Act 2025, equity-oriented tax treatment requires a scheme to maintain at least 65 percent in listed domestic equities.
Taxation for debt mutual funds is governed under Section 199 of the Income-tax Act 2025, which corresponds to the provisions previously enacted under Section 50AA of the Income-tax Act 1961. Under this statutory framework, a specified mutual fund is defined as:
A mutual fund scheme that invests more than 65 percent of its total proceeds in debt and money market instruments, or
A fund of funds scheme that invests 65 percent or more of its total proceeds in units of a mutual fund described in clause (1).
Because these schemes invest 100 percent of their corpus in repo securities and money market instruments, they meet the statutory test of a specified mutual fund:
Short-Term Classification: For units acquired on or after 1 April 2023, all capital gains resulting from the redemption of specified mutual funds are deemed to be short-term capital gains, regardless of holding duration.
No Indexation Benefit: Inflation indexation does not apply to debt mutual fund investments acquired after 1 April 2023.
Slab Rate Assessment: Realized gains are added to the taxpayer’s gross total income and taxed at their applicable slab rate.
Cess and Surcharge: A mandatory 4 percent health and education cess applies to the calculated tax. Surcharge applies additionally at higher personal and corporate taxable income thresholds.
Plans offering periodic payouts are designated as Income Distribution cum Capital Withdrawal (IDCW) options under SEBI rules. IDCW distributions are added to the unitholder’s taxable income and taxed at their applicable slab rate.
Worked Example 1: Corporate Treasury Short-Term Gain
A corporate entity in the 22 percent corporate tax bracket deploys surplus operational cash over a long weekend:
| Step | Computation Parameter | Amount |
|---|---|---|
| 1 | Investment date | Friday, 11 September 2026 (before 1.30 p.m.) |
| 2 | Purchase amount | ₹5,00,00,000 |
| 3 | Applicable NAV | Thursday closing NAV (historical pricing rule) |
| 4 | Redemption date | Monday, 14 September 2026 (online before 7.00 p.m.) |
| 5 | Gross redemption value | ₹5,00,28,000 |
| 6 | Gross short-term capital gain | ₹28,000 |
| 7 | Corporate tax rate | 22 percent |
| 8 | Base tax liability (22% of ₹28,000) | ₹6,160 |
| 9 | Health and education cess (4% of ₹6,160) | ₹246.40 |
| 10 | Total tax plus cess | ₹6,406.40 |
Assumptions: The corporate taxpayer qualifies for the 22 percent corporate tax rate under statutory conditions, zero surcharge applies, and units were acquired on 11 September 2026
Worked Example 2: Individual Taxpayer Short-Term Gain
An individual taxpayer in the 30 percent income tax bracket parks money in a scheme for 10 days while preparing to complete a transaction:
| Step | Computation Parameter | Amount |
|---|---|---|
| 1 | Purchase date | 5 October 2026 |
| 2 | Purchase amount | ₹25,00,000 |
| 3 | Redemption date | 15 October 2026 |
| 4 | Gross redemption proceeds | ₹25,03,500 |
| 5 | Gross short-term capital gain | ₹3,500 |
| 6 | Individual slab rate | 30 percent |
| 7 | Base tax liability (30% of ₹3,500) | ₹1,050 |
| 8 | Health and education cess (4% of ₹1,050) | ₹42 |
| 9 | Total tax plus cess | ₹1,092 |
Assumptions: The individual’s total taxable income exceeds the basic exemption limit, surcharge is nil, and units were acquired after 1 April 2023. Taxpayer-specific adjustments and surcharges apply separately based on individual income filings.
For an analysis of short-term capital gains rules across other asset classes, review our page on short term capital gain tax on mutual funds.
Frequently asked questions
SEBI defines overnight funds as open-ended debt schemes that invest exclusively in debt securities with a maturity of one business day. The entire portfolio turns over into cash every business morning and is redeployed into single-day repo instruments.
The purchase cut-off time is 1.30 p.m., requiring both application submission and fund realization before that deadline to receive the previous business day’s closing NAV. Under SEBI’s April 2025 circular, online redemptions submitted before 7.00 p.m. receive same-day closing NAV, while physical redemption submissions maintain a 3.00 p.m. cut-off.
Overnight funds hold Tri-Party Repos (TREPS) and market repurchase agreements backed by sovereign collateral. They do not hold commercial paper or certificates of deposit because RBI regulations require those money market instruments to carry a minimum maturity of seven days.
Under Section 199 of the Income-tax Act 2025, capital gains on specified mutual fund units acquired on or after 1 April 2023 are classified as short-term capital gains. Realized gains are added to taxable income and taxed at the investor’s applicable income tax slab rate plus a 4 percent health and education cess.
No. Overnight funds carry zero exit load as universal industry practice across Indian asset management companies. Investors can withdraw capital on any business day without incurring a redemption charge, distinguishing them from liquid funds that enforce a six-day graded exit load.
Mutual fund investments do not provide capital guarantees. While these portfolios exhibit very low interest rate sensitivity and hold sovereign-backed collateral, yields fluctuate with interbank rates, and schemes remain subject to operational and market risks.
Returns, Form 16, Form 26AS and capital gain statements for at least six years after the end of the relevant tax year. Keep purchase records for anything you still hold for as long as you hold it. You will need the acquisition cost whenever you eventually sell.
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.