There are open-ended debt funds which invest in the bonds maturing in one day. Such mutual funds are called Overnight Funds. Such funds allow every investor, whether an individual or an organisation, to invest and accomplish the financial goals with minimal risk involved.
Overnight Funds are processed, encashed and issued in the following way:
- At the beginning of the day, complete Assets Under Management (AUM) would be en-cashed 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
Features of Overnight Funds
These mutual funds can be categorised under the best investment plans as they have the least amount of risk involved. Here are some of the major features of overnight funds:
- Overnight funds have lower maturity as compared to liquid funds as a result of which the returns from these mutual funds are also low.
- Investors who are looking for suitable investment plans with their surplus corpus, disinclined to take risks can invest in overnight mutual funds.
- These are emergency funds known as safe investments as backup for medical emergencies etc.
Top 5 Overnight Funds in India FY 2019
Here is a list of the best mutual funds under the category of overnight funds:
|Fund||AUM (Crores)||3-Year Returns||5-Year Returns|
|HDFC Overnight Fund||Rs. 8,671||6.06||6.53|
|SBI Overnight Fund||Rs. 2,115||6.07||6.78|
|UTI Overnight Fund||Rs. 1,150||6.21||7.09|
|L&T Cash Fund||Rs. 572||6.27||7.02|
|Aditya Birla Sun Life Overnight Fund||Rs. 1,283||–||–|
(Data as on 2nd September, 2019; Source: Value Research)
Overnight Funds V/S Liquid Funds
The two types of debt funds are differentiated on the basis of following factors:
Allocation of the assets:- According to the norms of Securities and Exchange Board of India (SEBI), overnight funds are the type of mutual funds investing in bonds maturing in one day. These funds, in most cases, invest in TREP (Tri-Party Repo).
- According to the Clearing Corporation of India Limited (CCIL), a TREP is a repo contract where a third party besides the borrower and lender acts as a mediating party between the latter two, to provide services like selection of collateral, minimal settlement costs and management of the transaction.
On the other hand, Liquid funds are the type of mutual funds investing in debt and money market instruments maturing within 91 days. These funds have higher risk involvement than that of overnight funds. Liquid funds typically invest in diverse money market instruments such as Commercial Papers, Certificate of Deposits etc.
Risks Involved:- Overnight funds are one of the best investment options for the investors who are reluctant to bear any risks. Such funds invest mainly in bonds or collateral securities which minimise the risks incurred. Moreover, since these funds invest in securities with 1 day maturity, the interest rate risk is also almost nullified. However, while reinvesting, the current interest rates may not be the same as the previous rates affecting the risks involved.
Liquid funds are not restricted to one type of investments, they have a diverse portfolio for investing their assets. These involve comparatively higher interest rate risks and credit risks.
Returns Prospective:- Due to higher liquidity, the returns under Overnight funds go down and makes the type of funds apparently more sensitive to systemic liquidity conditions.
On the other hand, liquid funds hold the securities for a longer period of time which improves their potential returns rate. However, they involve higher risk as well.