Overnight funds, which are also referred to as money market mutual funds, are like that piggy bank with which customers probably save their little cash for one night or even two nights. These funds too are very liquid and allow the people to withdraw their money at any time point of time.
Moreover, Overnight Funds allow investors to save surplus cash, instead of leaving them lying idle in savings accounts. They are considered relatively stable investments as they have a short investment horizon of only one day.
On the positive side, they use very liquid investment securities and the redemption does not take a long time. In this blog, we will be discussing these funds as a reliable option for short-term investment goals and financial stability.
How do money market mutual funds work in overnight mode?
Money market mutual funds, which are open-ended debt funds, fall due the next business day. SEBI states that overnight mutual funds might invest in reliable assets like debts and money markets, overnight repo, etc.
These are funds that work with one-day term maturities. Each day, the fund manager buys new debt securities using the proceeds and has them maturing the following day for their respective portfolios. This happens cyclically, as each day’s earnings go towards purchasing securities for sale on the following day.
Moreover, the payment is made for the debt through the interest that the mutual fund earns overnight. Additionally, overnight funds are the preferred type of minimum credit risk and low-interest risk that fit most investors for a short-term avenue.
Advantages of Overnight funds
- Reasonable returns: They carry little or no risks and offer better returns than bank-based products. These could serve as a source of relative stability and balance in the portfolio.
- Low cost: Debt assets are passive products hence making the overnight funds cost-efficient in terms of expenses in comparison to other mutual funds. Investors need to go back to the details provided in the scheme information documents every time they learn something.
- Low risk: investors investing in overnight funds are on the low-risk investment side of the riskometer. Overnight or other short-term funds have lower investment horizons and mainly invest in debt and money market securities having only minimal credit risk, interest rate risk, and default risk.
People who can invest in overnight funds
- Investing in overnight funds which have low interest rate risk and low credit risk would be included as one of the types of debt fund with low interest rate risk. These are also ideal for conservative investors.
- For investors building up some amount for large investments and others, the overnight funds are perfect options as they grow at an average rate.
- On the other hand, overnight funds should be preferred by investors seeking an investment avenue that can be liquidated fast with no entry and/or exit load. This is the reason behind the name for overnight funds with a maturity period of just one night.
How are overnight funds taxed?
Overnight funds are subject to specific tax regulations, owing to their characteristic short-term investment nature. These funds typically involve low risk, as the investment duration is confined to a single business day. As investors gradually develop confidence in the stability of these funds, they opt to allocate their surplus funds, seeking higher interest returns compared to those offered by regular bank accounts. Essentially, these funds function as a reliable repository where short-term idle funds might be parked, allowing investors to accrue reasonable returns without sacrificing quick accessibility to their funds.
Given the transient and flexible nature of these investment vehicles, it becomes imperative for investors to comprehend the taxation implications associated with overnight funds. To streamline this process, investors can employ a SIP calculator, which facilitates the precise calculation of the applicable tax liabilities.
Conclusion
An overnight fund is one of the potentially stable options investors should consider for it has low risk, steady return, and high liquidity. Most individuals might use these funds since the risks involved are low compared to other schemes. However, this fund investment has a short investment period. Hence, it is possible to gain by utilising the fund rather than allowing the money to stay in your account.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
