Overnight Funds: A Quick Guide

Mutual funds have become a fairly familiar investment instrument for most urban Indians. However, the most associated type of mutual fund with the larger category is equity-linked mutual funds or tax-saver mutual funds, also known as ELSS. However, there are several types of mutual funds available, today, including overnight mutual funds.

If you haven’t heard the term overnight mutual funds, you might it find it intriguing to understand how exactly such funds work and what are the benefits and concerns associated with the same.

Here’s a quick guide to understanding overnight funds or overnight mutual funds.

What Are Overnight Funds

Overnight funds are mutual funds that fall under debt mutual funds; they are not linked to the equities market. They are linked to government securities, treasury bills, and money market instruments among others. These funds invest in securities for a maturity tenure of 1 day or overnight, offering high liquidity and zero exit load.

These are designed for investors with surplus funds who need to park these funds with a highly liquid and non-equity instrument. They are typically associated with low risk as compared to equity or hybrid mutual funds, and facilitate ultra-short-term investments.

Why You Should Consider Overnight Funds

There are a host of reasons why you should consider investing in overnight funds. First of all, there is always a situation where you have some surplus funds which you want to park temporarily until the need for using the same arises. However, you want this to be highly liquid and low-risk since you might need to exit any time, irrespective of market volatilities. Overnight funds address this requirement.

Secondly, while traditional debt instruments do offer some level of liquidity, several of them come with high lock-in periods and exit load in case of early withdrawals. This is not the case with overnight funds.

Moreover, the exit process with traditional debt instruments can often be cumbersome. Again, this is not the case with overnight funds. You can choose to exit by following a few steps online that only take a couple of minutes.

Lastly, overnight funds offer returns on your investment that are comparable to traditional debt instruments such as fixed deposits and not to equity-linked investments. Hence, you should consider the returns on overnight funds in context of the low interest you receive when your surplus funds are simply lying in the bank account or the net gains you make when you have to opt for premature withdrawals in case of fixed deposits etc.

Key Things To Remember While Opting For Overnight Funds

  • They are not an alternative to standard mutual funds that help you get closer to your investment goals
  • They are a safe, debt instrument that offers you returns despite offering extremely high liquidity and zero exit load
  • The minimum investment you need to make in an overnight fund is typically around Rs.5000
  • There are several overnight funds in the market and you should compare historic performances before going ahead and investing in one that works for you
  • Depending on your risk appetite and investment tenure, you should park a portion of your surplus funds in multiple overnight fund units to avoid massive withdrawal for a small requirement

To sum it up, overnight mutual funds offer high liquidity, a safe avenue to park surplus or emergency funds. Accoridngly, returns on overnight mutual funds are low when compared to standard mutual funds or equity-linked products that are subject to market risk.

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