Overnight Mutual Funds

Overnight mutual funds are SEBI (Security and Exchange Board of India) regulated debt funds that invest only in overnight securities having a one-day maturity. Usually these funds are invested in tri-party repos, reverse repos, and other money market instruments that mature the next day.  Because it matures in just 24 hours, it carries a lower risk than long-term debt funds.   

These funds are designed to park the surplus amounts just for a business day instead of leaving the money idle. One day maturity reduces default and interest rate risk, making it an ideal option for those who want to invest in debt funds with more liquidity and excellent return.    

• You invest in overnight mutual funds- The fund manager invests your money along with many other investors in overnight securities. 
• Securities matures the next day- When these investments mature the next day, the fund reinvested in new overnight securities and this process rolls over until you redeem units.
• Return accumulate- The interest earned from these investments contributes to the fund's NAV and consequently, your returns. 

Because the underlying securities have an extremely short maturity, overnight funds generally have lower interest rates and credit risk than longer-duration debt funds. However, they are still market-linked investments and do not offer guaranteed returns like an FD. 

Investors can invest in overnight mutual funds through Paisabazaar app. Follow the simple steps to start your investment journey:

1. Open your Paisabazaar app
2. Tap on ‘Mutual Funds’ on your mobile homescreen. 
3. Start exploring mutual funds by clicking on ‘View All’. 
4. Select one overnight mutual fund to invest under the category section. 
5. Complete your KYC to start investing in Overnight Funds. 

The taxation rule will be the same as that of debt funds, as overnight funds are debt funds.

• Investment on or after 1 April 2023: All gains are treated as short-term capital gains irrespective of holding period and taxed at your normal income tax slab rates, without indexation benefits.
• Investment before 1 April 2023: If you hold the investment for more than 36 months, it is treated as a Long-Term Capital Gain (LTCG) and taxed at 20% after indexation. Whereas Short-Term Capital Gain (STCG) is subject to your income tax slab rate.
    
• Dividend Taxation: Dividends are referred to as Income Distribution Cum Capital Withdrawal (IDCW) and are added to your total income and taxed according to your individual income tax slab rate.

Both are debt mutual funds designed for short-term parking of money. However, their primary distinction is the maturity of the securities they invest in.

Note- Neither fund guarantees returns or capital.