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In the dynamic world of finance, every investor seeks the perfect balance between maximising returns and minimising risk. Overnight funds, with their unique features, offer a compelling option for those seeking safe and liquid parking for their idle cash. This comprehensive guide delves into the intricacies of overnight funds, exploring their benefits, functionalities, and considerations for you to invest in mutual funds.

What are overnight funds?

Overnight funds, also known as very short-term debt funds, invest predominantly in highly liquid and short-term debt instruments with maturities of one day (overnight) to a maximum of up to three days. These instruments may include treasury bills, commercial papers, certificates of deposit (CDs) with very short maturities, and repos (repurchase agreements) with overnight maturity.

Key characteristics of overnight funds

  • High Liquidity: Overnight funds offer the highest liquidity among all debt funds. Investors can easily redeem their investments on the next business day (T+1), providing convenient access to their cash when needed.
  • Low Risk: By investing in highly rated and short-term debt instruments, overnight funds carry minimal credit risk. The short maturity further mitigates interest rate risk, as fluctuations in interest rates have a lesser impact on short-term instruments compared to longer-term bonds.
  • Low Returns: Due to their low-risk nature, overnight funds typically offer returns that are lower compared to other debt funds or equity investments. However, they tend to provide returns that are slightly higher than traditional savings accounts.
  • Tax Implications: Interest earned on overnight funds is taxed as per the investor's income tax slab. This makes them less tax-efficient compared to tax-saving fixed deposits (FDs) with longer lock-in periods.

Benefits of investing in overnight funds

  • Parking Idle Cash Effectively: Overnight funds offer a secure and convenient way to park surplus funds that you might need in the short term. This allows you to earn a slight return on your idle cash compared to keeping it in a low-interest savings account.
  • Managing Short-Term Financial Needs: If you anticipate a short-term cash requirement within a few days or weeks, overnight funds provide a readily accessible source of funds.
  • Managing Fluctuating Inflows and Outflows: For investors with fluctuating income or expenses, overnight funds can help manage these short-term cash flow fluctuations. Excess funds can be invested daily, and redemptions can be made as needed.
  • Minimising Risk in a Portfolio: Overnight funds can play a role in diversifying your investment portfolio. They offer a low-risk option while contributing to overall portfolio liquidity.

Considerations for investing in overnight funds

  • Low Returns: Investors seeking high returns should look beyond overnight funds. Their low-risk profile translates to a lower return compared to other investment options.
  • Tax Implications: The interest earned on overnight funds is taxed at your marginal tax rate, making them less tax-efficient compared to tax-saving FDs with a lock-in period of five years or more.
  • Expense Ratio: Compare the expense ratio charged by different overnight funds. A lower expense ratio translates to a higher net return for investors.
  • Credit Quality: While overnight funds typically invest in high-rated debt instruments, it's still prudent to check the credit quality of the underlying portfolio.

Who should consider overnight funds?

  • Risk-Averse Investors: Investors with a low risk tolerance seeking a safe and secure way to park their idle cash and earn a slight return can benefit from overnight funds.
  • Individuals with Short-Term Financial Goals: Individuals with upcoming short-term cash needs within a few days or weeks can consider overnight funds for easy access to their money.
  • Businesses with Fluctuating Cash Flow: Businesses with fluctuating cash inflows and outflows can utilise overnight funds to manage their short-term liquidity requirements.
  • Investors Parking Funds for Large Investments: Investors who plan to make a large investment in the near future but haven't yet identified the specific investment opportunity can park their funds in overnight funds until they find the right investment.

Investing in overnight funds

Here's a quick guide to investing in overnight funds:

  • Choose a Broker/Mutual Fund House: Select a reputable broker or mutual fund house to invest in overnight funds.
  • Compare Different Funds: Research and compare different overnight funds offered by various fund houses. Consider factors like expense ratio, credit quality, and any additional features offered.
  • Invest Online or Through Your Broker: Most brokers and mutual fund houses offer online and offline investment options.
  • Monitor Your Investment: Periodically monitor your overnight fund investment and keep yourself updated on market conditions.

Alternatives to overnight funds

While overnight funds offer a compelling solution for parking idle cash, they might not be suitable for everyone. Here, we explore some alternative options to consider based on your specific needs and risk tolerance:

  • Savings Accounts: Traditional savings accounts offer a basic level of liquidity and safety for your cash. However, they typically offer very low interest rates, sometimes barely keeping pace with inflation.
  • Liquid Funds: Similar to overnight funds, liquid funds invest in short-term debt instruments with maturities ranging from 91 days to up to 180 days. They offer slightly higher returns compared to overnight funds due to the slightly longer maturity profile, but liquidity remains high with redemption typically possible within a business day.
  • Fixed Deposits (FDs): Fixed deposits offer guaranteed returns for a predetermined period. They can be a good option if you have a specific short-term goal in mind and don't require immediate access to your funds. However, FDs come with lock-in periods, and early withdrawals typically incur penalties. Look for FDs with shorter lock-in periods (e.g., 30 - 90 days) if you prioritise some level of liquidity.
  • Money Market Mutual Funds: These funds invest in a broader range of short-term debt instruments, including commercial paper, certificates of deposit, and government securities. They can offer slightly higher returns compared to overnight funds and liquid funds, but come with a slightly higher degree of credit risk due to the wider range of underlying investments.
  • Peer-to-Peer (P2P) Lending: P2P lending platforms connect investors with borrowers directly. Investors can potentially earn higher returns compared to overnight funds, but P2P lending carries a higher degree of risk as there's a chance of borrowers defaulting on their loans. Thorough research and platform selection are crucial when considering P2P lending.

Choosing the right option for mutual fund investments

The best option for you to invest in mutual funds depends on your individual circumstances. Here are some key factors to consider:

  • Investment Horizon: How soon will you need access to your funds? Overnight funds and liquid funds offer the highest liquidity, while FDs with shorter lock-in periods can be an option if you can tolerate a slight restriction on accessibility.
  • Risk Tolerance: How comfortable are you with potential risks? Overnight funds and savings accounts offer minimal risk, while P2P lending carries a higher degree of risk.
  • Expected Return: What kind of return are you hoping to achieve? Overnight funds offer low returns, while P2P lending has the potential for higher returns but at a higher risk.


Overnight funds provide a valuable tool for investors seeking a safe and liquid way to park their idle cash. By understanding their features, benefits, and limitations, you can determine if they align with your mutual fund investment goals and risk tolerance. Remember to explore alternative options like liquid funds, and FDs with short lock-in periods, and carefully evaluate P2P lending platforms if you seek potentially higher returns while acknowledging the associated risks. Ultimately, the optimal choice depends on your specific financial needs and investment objectives.

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