Best Overnight Funds

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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 – 

  1. 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.
  2. 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. 
  3. 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 – 

  1. 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.
  2. 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.
  3. 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.
  4. 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

  1.  Safety First: Overnight funds prioritise safety and liquidity over high returns, making them an ideal choice for risk-averse investors.
  2. Savings Account Alternative: Think of overnight funds as a secure alternative to a savings account, with the added benefit of potential slightly higher returns.
  3. 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.
  4. Align with Goals: Your investment in overnight funds should align with your financial goals and strategy.
  5. 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 – 

  1. 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).
  2. 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.

  1. 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.
  2. 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

The following are the top 5 best overnight funds available in the market –

Name of the fund Assets Under Management (in ₹ crore) Minimum Investment Amount (in ₹) 3 month returns (%) 6 month returns (%)
Bank of India Overnight Fund Direct Plan Growth 50 5,000 1.59 3.17
Mirae Asset Overnight Fund Direct Plan Growth 402 5,000 1.59 3.15
Axis Overnight Fund Direct Plan Growth 17,889 500 1.59 3.14
Nippon India Overnight Fund Direct Plan Growth 6,960 100 1.59 3.14
HSBC Overnight Fund 3,195 5,000 1.59 3.14

The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on 6-month returns, which are subject to change frequently. Check out real-time data on Angel One.

Bank of India Overnight Fund Direct Plan Growth

The fund has an expense ratio of 0.17%, no lock-in period and zero exit load. Launched in January 2020, it is a fairly new fund with not a long track record. The fund, managed by Mithraem Bharucha, invests over 99% of its money in reverse repo instruments.

Mirae Asset Overnight Fund Direct Plan Growth

The fund has a low expense ratio of 0.11%. It has zero exit load and no lock-in period. This fund is also fairly new and has been in existence since October 2019. The fund invests around 91% of its money in repo instruments and 8% in TREPS.

Axis Overnight Fund Direct Plan Growth

The fund has an extremely low expense ratio of 0.05%. It has no exit load or lock-in period and does not support SIP investment. It was launched in March of 2019. Over 90% of the fund is invested in TREPS.

Nippon India Overnight Fund Direct Plan Growth

This fund also has an extremely low expense ratio of 0.08% along with zero exit load and no lock-in period. The fund was launched in December 2018. It invests primarily, which is well more than 90%, in reverse repo instruments.

HSBC Overnight Fund Direct Growth

This fund has an expense ratio of 0.10% along with zero exit load or lock-in period. The fund has been in operation since May 2019. It invests primarily in reverse repo instruments and TREPS.

Mutual Funds Calculators

Overnight Funds FAQs

Are overnight funds high risk?

Overnight funds actually pose an extremely low risk as the instruments in their portfolio are settled almost daily. Therefore, the credit risk and interest risk involved is nearly zero. This makes overnight funds perfect for people who want to invest their money but also want to avoid risk.

Should I invest in overnight funds?

Overnight funds offer an excellent opportunity to diversify your portfolio and reduce its overall risk level. You can also park your money in overnight funds until you find a more suitable, high-return investment that you like.

What are the expected returns of overnight funds?

Returns from even the best overnight funds vary from year to year. However, the overall returns are generally lower than returns from riskier funds such as small-cap funds.

What are the risks involved in investing in overnight funds?

Credit risk and interest rate risk are the only risks that overnight funds face, that too at very low levels. Other than that, overnight funds have a very low-risk profile.

Are overnight funds taxable?

Overnight funds are treated similarly to debt funds for taxation purposes. Both short-term and long-term gains from overnight funds can be taxable based on the total period of investment. Dividend incomes are taxed as per the income tax slab the investor falls in.

How much money should I invest in overnight funds?

The investment amount depends on the total corpus of funds you plan on investing into stocks/FDs/Mutual funds and the level of risk you are willing to take.