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Overnight Fund – Features, Suitability, Advantages & Disadvantages

Last Updated : 24 Oct, 2023
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What is Overnight Fund?

Overnight Funds refer to a category of mutual funds focused on investing in short-term debt instruments and money market securities with very short maturity periods typically no longer, than one day. The main objective of an Overnight Fund is to provide investors with a place to park surplus funds while earning higher returns compared to traditional savings accounts. These funds aim to help investors generate returns, on their cash reserves thereby optimising their overall investment portfolio.

The primary objective of Overnight Funds is to offer investors a way to temporarily park surplus funds overnight or, for very short durations. These funds aim to generate returns that surpass those offered by savings accounts.

These funds have a characteristic that sets them apart. They prioritize safeguarding capital minimising the impact of interest rate changes and allowing access, to money without any fees for withdrawal. Overnight Funds are especially appealing to investors with cash reserves and individuals looking for a low-risk investment choice that offers flexibility, for short-term financial objectives. Overnight Funds are considered a low-risk investment option. Have gained popularity among conservative investors who seek stability in their portfolios.

Features of Overnight Funds

Overnight Funds offer advantages as they focus on money market instruments with a one day maturity period. This ensures liquidity and minimal exposure to interest rate risks making them an excellent choice for investors who’re cautious about taking risks. These funds provide flexibility and accessibility to investors through Net Asset Value (NAV) calculations and no exit loads.

1. Short-term Duration: Overnight Funds invest in money market instruments that have a maturity period of one day. As a result they offer liquidity. Pose very little risk in terms of interest rates.

2. Risk: These funds are considered to be one of the options available, in the mutual fund market. Since they primarily invest in securities with maturities the credit risk and interest rate risk associated with them are minimal.

3. Daily Returns: The Net Asset Value (NAV) of Overnight Funds is calculated on a basis reflecting the returns earned by the fund on that day.

4. No Exit Load: Most Overnight Funds do not charge an exit load making them an appealing choice for investors who may need to withdraw their funds without facing any penalties.

5. High Liquidity: Investors can buy or sell units of Overnight Funds on any business day. This feature ensures that individuals or companies can easily access their funds whenever necessary.

Purpose of Overnight Fund

The main purpose of these funds is to offer investors an easily accessible option, for storing money. It allows them to earn a profit on their cash while keeping their risk of credit and interest rate fluctuations to a minimum.

1. Safety of Capital: Overnight Funds are considered one of the investment options since they primarily invest in short-term debt instruments with credit risk.

2. Liquidity: These funds offer high liquidity allowing investors to access their funds on any business day without facing exit loads or significant delays.

3. Better Returns than Savings Accounts: Overnight Funds provide returns compared to traditional savings accounts making them an appealing choice for parking surplus funds.

4. Minimal Interest Rate Risk: Due to the short duration of investments Overnight Funds are less affected by interest rate fluctuations resulting in lower interest rate risk compared to longer term debt funds.

5. Flexibility: Investors can easily start or stop investments in Overnight Funds making them a flexible option, for managing liquidity and surplus funds.

Who Should Consider Investing in Overnight Fund?

Overnight Funds are particularly suitable for institutions with cash reserves who want to optimize their returns without compromising safety. Individuals seeking liquidity and secure investments can also benefit from these funds. Conservative investors who prioritize capital preservation will find Overnight Funds appealing while individuals with term goals such as vacations or debt payments can achieve better returns compared to traditional savings accounts. Overnight Funds are particularly suitable for the following types of investors:

  1. Institutions, with cash reserves.
  2. Net worth individuals seeking liquidity and safety.
  3. Conservative investors who prioritize preserving their capital.
  4. Individuals with term goals.
  5. Those with a low risk tolerance.

Factors to Consider Before Investing in Overnight Funds

Before delving into Overnight Funds it’s important to evaluate your investment timeframe. These funds are designed for short term goals and even though Overnight Funds have low risk profiles understanding your risk tolerance is crucial. Before embarking on any investment it is crucial to set expectations, for returns. Additionally it is wise to review any charges that might arise when exiting an investment. Here are some factors that you need to consider before investing in Overnight Funds:

1. Investment Timeframe: Overnight Funds are best suited for short term investments. If you have a term goal it might be worth exploring other types of mutual funds that could potentially offer higher returns.

2. Risk Tolerance: While Overnight Funds are generally less risky, it’s essential to assess your tolerance, for risk and align your investment objectives accordingly.

3. Return Expectations: Keep in mind that Overnight Funds typically provide returns. If you’re aiming for returns it might be worth exploring mutual fund categories.

4. Exit Load: While most Overnight Funds don’t impose exit loads it’s always wise to review the terms and conditions of the fund you’re considering.

5. Tax Considerations: Familiarise yourself with the tax implications associated with investing in Overnight Funds. Typically any gains, from these funds are treated as short term capital gains. Taxed at your income tax slab rate.

Advantages of Overnight Funds

Overnight Funds have benefits that make them attractive, to investors. One major advantage is their liquidity, which allows investors to access their funds whenever needed without any exit loads or penalties. These funds mainly invest in risk and short term instruments ensuring that your invested capital remains protected from market volatility. Here are some of the advantages of Overnight Funds:

1. Liquidity: One significant benefit of Overnight Funds is their liquidity, which means you can access your investment on any business day without worrying about facing exit loads or penalties.

2. Safety: These funds mainly invest in low risk, short term instruments to minimize the possibility of losing capital due, to market fluctuations.

3. Limited Exposure to Interest Rate Risk: Overnight Funds are less affected by interest rate changes compared to debt funds because they have a one day maturity.

4. Better Returns than Savings Accounts: They generally offer comparatively good returns, than what you would typically earn from traditional savings accounts.

Disadvantages of Overnight Funds

Although Overnight Funds provide stability and easy access to funds there are a drawbacks to consider. Here are some of the disadvantages of Overnight Funds:

1. Returns: Overnight Funds offer modest returns compared to other types of mutual funds.

2. Not Suitable, for Long-term Goals: These funds are not intended for long term wealth accumulation. May not be the choice for investors with extended investment timeframes.

3. Tax Implications: Gains from Overnight Funds are subject to taxation based on the individuals income tax rate, which could potentially reduce returns.

4. Inflation Risk: Since the returns are relatively low there is a concern that the invested capitals purchasing power may not keep up with inflation.


Overnight Funds can be an addition to an investment portfolio for individuals and entities seeking risk and highly liquid options. They serve the purpose of preserving capital while offering returns than traditional savings accounts. However these funds are most suitable for investors, with investment timeframes or those who prioritize safety over high returns. Before investing in an Overnight Fund it is essential to understand its features, consider your risk tolerance and align it with your goals to make an investment decision.

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