But what are overnight mutual funds, and how do they help reduce risk?
About overnight mutual funds
Overnight mutual funds are a type of debt mutual fund that primarily invests in short-term instruments, typically with a maturity period of one day. These funds invest in highly liquid securities like reverse repos, Tri-Party Repos (TREPS), and government securities, all of which mature the following day.
As a result, these funds are considered extremely low-risk because they are not impacted by interest rate fluctuations or credit risks associated with longer-term investments.
Key features of overnight mutual funds
Capital protection: Overnight funds invest in short-term securities with a one-day maturity, making them virtually immune to market volatility and interest rate risks.
High liquidity: These funds allow easy redemption with T+1 settlement, making them ideal for short-term parking of funds. Investors can access their funds quickly without any exit loads, ensuring flexibility.
Low risk: Given their investment in high-grade, short-duration instruments, overnight funds carry minimal credit risk. The likelihood of default over a one-day period is extremely low.
Modest returns: While they are not designed for wealth creation, overnight funds offer returns higher than traditional savings accounts, typically ranging from 5% to 6.5% annually, depending on the interest rate environment.
No exit load: Investors can enter or exit overnight funds without incurring any exit charges, making them an attractive option for temporary investment.
How have some overnight MFs performed?
According to data from AMFI (Association of Mutual Funds in India), overnight funds have consistently provided stable returns, typically in the range of 5% to 6% per annum, with zero instances of capital loss over recent years.
Top overnight mutual funds based on annualised returns (Source: AMFI)
| Fund Name | 1-Year Return | 3-Year CAGR | |
| Bank of India Overnight Fund – Regular Plan – Growth | 6.72% | 6.77% | 6.27% |
| Sundaram Overnight Fund – Direct Plan – Growth | 6.60% | 6.65% | 6.20% |
| Aditya Birla Sun Life Overnight Fund – Direct Plan – Growth | 6.66% | 6.67% | 6.22% |
| Tata Overnight Fund – Direct Plan – Growth | 6.73% | 6.69% | 6.22% |
| Nippon India Overnight Fund – Direct Plan – Growth | 6.73% | 6.68% | 6.23% |
| Kotak Overnight Fund – Direct Plan – Growth | 6.69% | 6.67% | 6.22% |
| Union Overnight Fund – Direct Plan – Growth | 6.68% | 6.66% | 6.21% |
| Aditya Birla Sun Life Overnight Fund – Regular Plan – Growth | 6.66% | 6.56% | 6.10% |
| Bajaj Finserv Overnight Fund – Regular Plan – Growth | 6.73% | 6.61% | N/A |
| Franklin India Overnight Fund – Direct Plan – Growth | 6.71% | 6.61% | 6.15% |
| TRUSTMF Overnight Fund – Direct Plan – Growth | 6.59% | 6.66% | 6.20% |
| Nippon India Overnight Fund – Regular Plan – Growth | 6.73% | 6.59% | 6.13% |
| JM Overnight Fund – Direct Plan – Growth | 3.88% | 6.59% | 6.17% |
| ICICI Prudential Overnight Fund – Regular Plan – Growth | 5.12% | 6.59% | 6.12% |
| HDFC Overnight Fund – Direct Plan – Growth | 6.76% | 6.60% | 6.16% |
| Kotak Overnight Fund – Regular Plan – Growth | 6.69% | 6.58% | 6.11% |
| DSP Overnight Fund – Regular Plan – Growth | 6.70% | 6.58% | 6.14% |
| Baroda BNP Paribas Overnight Fund – Regular Plan – Growth | 6.72% | 6.58% | 6.14% |
How overnight mutual funds help lower risks in volatile markets?
Overnight mutual funds can play a crucial role in managing risk during periods of market volatility.
According to Rajesh Sinha, Senior Research Analyst at Bonanza Group, “Overnight mutual funds provide stability by investing in one-day maturity instruments, which protects investors from market swings and ensures low risk exposure.”
This makes them ideal for capital preservation, especially during uncertain times when market conditions are unpredictable.
As noted by Ajay Kumar Yadav, CEO and CIO of Wise Finserv, these funds are useful for conservative investors or corporate treasuries who prioritise safety and liquidity over high returns.
By temporarily parking their capital in overnight funds, investors can reduce their equity exposure and safeguard their principal while they await better market conditions.
Alekh Yadav, Head of Investment Products, Sanctum Wealth, explains that “overnight funds are considered highly safe because they invest in short-duration securities, which have minimal credit and interest rate risk. These funds almost never deliver negative returns, even during market stress.”
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Benefits of overnight mutual funds
Risk mitigation: By investing in low-risk instruments, overnight funds offer a safe haven during times of market uncertainty.
Liquidity: Easy access to funds with no exit load, making them an excellent choice for short-term cash management.
Better returns than savings accounts: These funds generally offer a better rate of return than traditional savings accounts, making them ideal for investors who need to park idle funds temporarily.
Drawbacks of overnight mutual funds
Lower returns: While safe, the returns on overnight funds are relatively modest, usually between 5% to 6.5% annually, which may not suit investors seeking higher growth.
Not suitable for long-term goals: Overnight funds are primarily used for capital preservation and not for long-term wealth creation.
Taxation: Like other debt funds, returns from overnight funds are taxable based on the investor’s income tax slab, making them less tax-efficient compared to equity funds, especially for high-net-worth individuals (HNIs).
Should you invest in overnight mutual funds?
Overnight mutual funds can be a smart choice for investors seeking safety, liquidity, and stable returns with minimal risk. These funds invest in securities with a maturity of just one day, which significantly reduces interest rate and credit risk.
They are especially suitable for conservative investors, those looking to park idle cash temporarily, or anyone needing quick access to their funds.
While the returns may not match those of long-term equity or debt funds, the capital preservation and ease of liquidity make overnight funds a reliable option in volatile market conditions or for short-term financial goals.