Best Overnight Funds: Get Historic Returns, Performance, Features, Advantages and Taxation

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Understanding Overnight Funds

SEBI defines overnight funds as open-ended schemes investing in overnight securities; ones that have a maturity period of 1 day. These funds aim to exist as investment options for both, the smallest investor and the biggest corporate to invest in debt funds, even for a night’s investment period.

Features

• Overnight funds are known to invest only in securities that mature in a day
• This implies that the fund managers of these funds buy securities on a daily basis. The securities mature in a day and the funds thus gathered are used in buying new securities
• Due to the investment mandate of such a short time period, these funds are considered highly liquid in nature
• These funds allow investors (whether individual or organization) to pool in funds and achieve their investment goals at the minimum risk
• Overnight funds have lower maturity period, thereby resulting in generating lower returns by these funds
• These funds are also known as emergency funds and considered safe to be deployed in cases of emergencies

This is how overnight funds are processed, encashed and issued–

• At the beginning of the day, all the assets under management are en-cashed in order to purchase overnight bonds
• These bonds mature on the very next business day
• The managers of the fund then take the cash from respective bonds and buy more overnight bonds on the next day

Advantages

• Overnight funds are considered the safest among all debt mutual fund options. This is due to their investment horizon of just one day that dynamic factors such as interest rate changes and default in securities fail to affect these funds
• Investors who are looking for alternatives to bank deposits and/or FDs should rather invest in overnight funds, and benefit from the returns offered
• Due to their very short investment horizon, these schemes are not affected by the changes in interest rates and the defaults in securities
• Ideally, any investor who intends to safely park his/her surplus at almost no risk at all, for a very short time period, without worrying about the returns should invest in overnight funds

Who should Invest

• Investors who are looking for suitable investment plans with their surplus corpus, disinclined to take risks can invest in overnight mutual funds
• Overnight funds are ideal for investors who do not wish to park their money for a long period of time and intend to benefit from extra returns with the least amount of risk
• Overnight funds carry negligible risk and are apt for investors who have a very short investment horizon
• Investors who wish to gather funds for medical emergencies or others may invest in these funds as a backup option

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Things to be Considered

• Although the risk involved in these funds is minimal, it must be noted that the returns offered by these funds are not stable; hence, these funds are not ideal for conservative debt mutual fund investors
• Due to the minimal risk involved, investors put in huge amounts in these funds as even an inch of a rise in the returns could result in huge gains on the corpus
• Retail investors, investing in little amounts in these funds may not benefit from these funds
• In comparison with liquid funds, overnight funds offer more safety, but, do not guarantee returns on small investments. It is beneficial to invest in these funds only if you have a huge sum of money to be invested for a very short time frame

How to Invest

You can invest in overnight funds through either of the following ways-

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Canceled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification)
• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC

  and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment

Best Overnight Funds to Invest

Here is a list of the best mutual funds under the category of overnight funds:

(Data as on 30 January 2020; Source: Value Research)

Taxation

If an investor has made a capital gain of ₹50000 on investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor. ₹50,000 would be added to the taxable income of the investor and taxed accordingly.

If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.

Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment.

To calculate the final value of capital gains post indexation, we use the government’s Cost Inflation Index (CII) in the following formula:

Indexed cost of Acquisition = Investment Amount * (CII of the year of withdrawal/ CII of the year of investment)

Suppose the investment amount is ₹70,000 in the year 2016 and the withdrawal amount is ₹1 Lakh. The value of capital gains is ₹30,000 before indexation

Indexed Cost of Acquisition= 70000* (280/254) = 77165.35

Note: CII in the year 2015 = 254

CII in the year 2018 = 280

Final Value of Capital Gains= 100000- 77165.35 = 22834.65

Tax Payable = 20% of 22834.65 = 4566.93