Overnight Mutual Funds – Concept, Workings, Objective, Features, Example & more

What Overnight Mutual Funds are all about, and how does it work? In this article, we will know everything about it.

It doesn’t matter at all how much money you make in your daily life. But the thing that matters a lot is how much you are saving for your future. It can be a myth that you are earning a fair amount. 

Just evaluate your income and expense and see at which financial position you are likely to stand in the future. 

Every week you withdraw money from your account to pay those hefty expenses. Of course, the bank isn’t giving you extensive interest amounts that can reduce the pressure. 

But, what if your income generates a fair amount of interest overnight that you can use to pay off your minor expenses.

Sounds unique, right! Of course, it is because overnight mutual funds provide you this opportunity. 

What are Overnight Mutual Funds?

The overnight fund is a new version of Mutual Funds that invest predominantly in assets that are held overnight. 

Unlike those long-term or short-term mutual funds, overnight mutual funds purchase and sell assets and securities by the following business day.  

The fund manager who handles these funds keeps their eyes on debt and liquid funds that are likely to perform good overnight and invest in them. 

Similarly, the investor doesn’t depend upon a single asset or securities for a longer period. It satisfies risk-averse investor’s requirements.

That’s why overnight mutual funds are also known as investor-friendly mutual funds. 

Investors purchase assets and securities at the start of a business day, hold them overnight, and sell them by the next business day.

This process goes on repeatedly, and during the trading hours, investors can purchase more securities. 

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How an Overnight Mutual Funds Work?

Let’s obtain an in-depth understanding of overnight mutual funds. How do they work, their source of returns, and how they produce a good amount of returns for the investors?

Assets in which Overnight Mutual Funds Invest

Overnight Mutual Funds predominantly invest in debt and money market securities. The assets and securities that overnight mutual funds hold represent only one day maturity period. 

Similarly, by following the terms and conditions set by the Stock Exchange Board of India, these funds invest only in such assets and securities that mature overnight. 

Though, these funds do never hold any security permanently. Every business day, they are replaced with new asset or security. 

Also, this mutual fund scheme doesn’t invest in any risky debt instruments or deposits because overnight schemes aren’t allowed to do it. 

Source of Earnings

Interest earned on debt holdings is the major source of earning of the Overnight Mutual Funds scheme.

These funds don’t attract substantial capital gains as the assets and securities in which these MF schemes invest mature within a day. 

Similarly, the returns obtained from these funds are the lending and borrowing rates that change overnight.  

Let’s understand it better through an example. Suppose the interest rate of the market drops overnight and the liquidity is high. It’ll lead to a fall in the money market rates. 

On the other hand, if the market’s interest rate rises overnight and the liquidity is low, it’ll lead to an increase in market rates.

In a nutshell, the returns you get from these funds are predominantly based on the market rates that can rise or drop overnight. 

Income Generation Process

Overnight Mutual Funds aren’t just held overnight, but these are changed every day. Fresh securities are purchased in the place of the old one by the next day. 

However, at the start of every business day, the fund is usually kept in a cash form, which can be called Asset under Management. 

Since these securities mature overnight, investors can observe a meager increase in AUM scope.

In a nutshell, the returns obtained from securities become the sum total of the amount used to purchase new securities on the next business day. 

Find details of other Types of Funds here

Objective of Overnight Funds

The chief objective of Overnight Mutual Fund is to ensure the best utilization of cash. 

Overnight funds can be an excellent option for investors who want to park their money into an MF scheme for a couple of days. So that, the invested amount can generate an extra rupee. 

In this way, investors ensure the right utilization of their money rather than keeping it in a regular saving account.

Let’s look at the objectives of this mutual fund scheme to get a thorough insight into it. 

High Liquidity

Overnight Mutual Funds invest in highly liquid instruments. Similarly, investors can trade within trading hours. Any time he can enter or exit the market.   

Very Short Investment Horizon

These funds come with one of the shortest investment horizons. Within a day, the assets and securities are traded to generate a decent amount of returns. 

Ensure Low Risk

Overnight Mutual Funds are relatively less risky due to the lowest maturity period of their assets. It makes all these assets comparatively less risky.

Also, the default risk and interest rate risk are relatively minimal as compared to other options. 

Low Expense Ratio

Overnight Mutual Fund’s expense ratio is relatively low as these funds’ portfolio is not actively managed. Thereby you may find the expense ratio, not above 1%.  

Benefits of Investing in Overnight Mutual funds

Now, you are fully familiar with the concept of these funds, such as how these funds work and what the main objectives of these funds are. Next, we will discuss the benefits of these funds. 

They come with one of the shortest investment horizons, which is the biggest reason behind its safe investment. 

Apart from this single benefit, this scheme has much to offer you.  Have a look at the benefits associated with investing in Overnight Mutual Funds listed-below:

Low Risk

Overnight Mutual Funds invest in assets with significantly less maturity period, so investment stays safe.

The probabilities of default risk are also very low because most securities mature within a day. 

No Penalty

Usually, Mutual Funds schemes charge a hefty penalty when exiting the market or during redemption of the amount. 

But with an overnight mutual fund scheme, you won’t encounter this issue. This MF scheme doesn’t charge you any penalties.  

The Best Utilization of Money

If you have recently received your salary, half portion amount from it, you can invest in an Overnight Mutual Fund. 

These funds offer you a higher return, which you can utilize to pay your daily expenses. No wonder it’s a way better alternative than keeping the amount in a saving account. 

Market Crisis

During the market crisis, investment in Overnight Mutual Funds can prove to be a better decision.

This is because, amidst the uncertain market conditions, these mutual funds will keep generating returns for you. 

Even though how worse the market performance is, these funds will constantly generate income for you. 

Flexible Holding Period

Investors can anytime enter or exit the funds. Since these funds trade daily, so investors can hold their investment for as long as they aspire.

The main focus of these funds is to ensure safe and higher returns.  

Low Cost

Overnight Mutual Funds are celebrated as low-cost debt funds. These funds aren’t actively managed.

That’s why; the expense ratio remains equal to or below 1%. Similarly, you do not need to worry about deduction in the margin.  

Find details of all types of Debt Funds here

Who should invest in Overnight Mutual Funds?

Investors often ask whether they should invest in Overnight Mutual Funds or not. 

Though, there are lots of misconceptions that revolve around this unique MF scheme. But, if you want to come up with a well-informed decision, then first make a pattern of your preferences. 

What is your investment goal, for how long you want to park your money in Mutual Funds? 

This is an appropriate choice for investors who wish to invest for a very short timeframe. However, you can park your money in these funds for a day to many years. 

But if you want to invest an immense amount for a few months or more than that, ‘Overnight Mutual Funds’ might not be an ideal option for you. 

The return rate obtained from these funds is better than regular bank saving account annual-returns; still, it isn’t that good. 

Yet, they can prove to be a fruitful alternative for a few people. 

Such as, corporations can invest in these funds and generate returns out of them rather than holding the money in their bank account or current accounts. 

Example of Overnight Mutual Funds

After a few days, if the amount is needed to fulfill the working capital requirements, instead of keeping the cash in the current account, think about investing it in Overnight Mutual Funds to produce income.

Note: If you want to switch to equity funds, you can use the Systematic Transfer Plans (STP) to shift investment from Overnight Mutual Funds to high-return producing equity funds. 

The returns and credit risk ratio of Overnight Mutual Fund is quite similar to the liquid funds. Hence, if the investor doesn’t want to invest in these funds, they can choose liquid funds. 

Things to consider before Investing in Overnight Mutual Funds

Overnight Mutual Funds invest predominantly in debt instruments and money market instruments.

Therefore, these investments are safe by all means. It is unlike other Mutual Fund schemes. 

On the one hand, it can provide you favorable results. But at a few points, it can underperform. Hence if your expectations are high from this mutual fund, consider a few things before diving in. 

Returns

Overnight Funds offer a lower rate of returns to the investors. Only in special circumstances, the assets and securities in these funds produce higher returns. 

That’s why your returns expectancy should be minimal from Overnight Mutual Funds.

But if you are searching for the best alternative of saving bank account, then, of course, you should invest in these Funds. 

However, these funds are quite similar to liquid funds. That’s why you can choose any of these options.  

Expense Ratio

Overnight Mutual Funds come with only a 1% expense ratio or below. Since it doesn’t produce higher returns, a higher expense ratio can substantially reduce the margin value. 

Make sure you are choosing an Fund with a 1% expense ratio or below that. If you want to enjoy higher returns from one of the safest and the shortest mutual fund schemes, remember this little thing. 

Focus on your Goal

Though, the risk probabilities are relatively low if you are investing in Overnight Mutual Funds. But make sure you don’t invest in Overnight Mutual Funds based on any news or suggestion. 

These funds produce lower returns as they invest predominantly in debt assets having the shortest maturity period.

Hence, it is highly recommended investing in these mutual funds based on your goals.

If you have surplus cash in your hand or bank account, you can invest in an this Fund. Also, don’t invest your entire money in these funds if you want to avoid risk. 

You can invest in other related short-term funds such as liquid funds that also serve you the same risk and return ratio. 

Check out all types of Hybrid Funds here                  

Overnight Mutual Funds – Conclusion

Overnight Mutual Funds invest in assets and securities that mature within a day. Though, these funds are not an ideal option for investors looking for a long-term investment plan. 

Still, for corporate and businesses, these funds come with an outstanding opportunity.

If currently, you do not need to employ cash in your business operation, you can invest them in Overnight Mutual Funds.  

However, these funds don’t provide you that attractive returns; still, they are a way better option than keeping money in your current account or saving accounts. 

The advantages of these funds are not hidden from us. These are investor-friendly mutual fund plans. 

Apart from overnight mutual funds, retail investors can park their money in Liquid Funds as well because they also serve you a similar risk and return ratio.  

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