Overnight Funds

Overnight funds are a type of open-ended debt scheme that invests in debt securities maturing the next day. Explore meaning, advantages, and more in this blog.
Overnight Funds
4 mins read
29 January 2024

An overnight fund is a type of open-ended debt mutual fund that invests in money market instruments with a maturity of one day. These funds are considered to be very low-risk investments as the underlying securities are highly liquid and have low default risk. This article will delve deeper into overnight funds meaning, overnight funds advantages, overnight funds taxation and many more in detail.

What are overnight funds?

Overnight funds belong to the category of open-ended debt funds that primarily invest in assets or securities with a residual maturity of just one day. In this unique investment strategy, the fund manager ensures that the portfolio consists of securities that mature daily. As these securities mature, the fund manager utilises the proceeds to acquire new securities with a one-day maturity, creating a continuous cycle.

The distinctive feature of overnight funds lies in their immunity to interest rate risk and default risk, common in other types of debt funds, as the securities mature the very next day. However, the conservative risk profile translates to comparatively lower returns. This category of debt funds emerged in 2018 as part of SEBI's mutual fund reclassification initiative.

How do overnight funds work?

Overnight funds invest in diverse debt securities, each with a maturity of just one day, adhering to SEBI regulations that restrict investments in instruments with a maturity period exceeding a single day. Consequently, the fund's portfolio undergoes daily changes as underlying securities mature, making room for fresh ones. Essentially, the fund manager replaces overnight-maturing debt instruments with new ones daily, resulting in a consistent turnover. The Assets Under Management (AUM) sees incremental growth due to interest payments from these securities.

Objectives of overnight funds

Overnight funds cater to investors seeking to maximise returns on their idle cash for short periods. These funds offer three key advantages:

  • Short-term parking: They provide a safe and liquid avenue to invest your extra cash, ensuring easy access whenever needed.
  • Low risk: By investing in securities maturing the next day, there's minimal risk of default, making them a conservative option within debt funds.
  • High liquidity: Overnight funds invest in assets that can be readily converted to cash within a day by redeeming units from the fund house. This ensures easy access to your money while still generating returns.

Advantages of overnight funds

  • Low risk: Overnight funds are considered to be very low-risk investments as the underlying securities have low default risk.
  • Liquidity: Overnight funds are highly liquid investments. This means that investors can easily redeem their units at any time.
  • Moderate Returns: While returns are modest, they tend to be higher than traditional savings accounts.
  • Investment Flexibility: In overnight funds, investors have the freedom to deposit and withdraw their funds at their discretion. Once the initial deposit is made, you have the option to reinvest your funds daily or make withdrawals as needed. Investors who choose to reinvest their funds increase their potential for long-term profitability.

Who should invest in overnight funds?

Overnight funds are a good investment option for investors who have the following characteristics:

  • They have short-term cash surpluses that they do not need for immediate use.
  • They are looking for a relatively safe and liquid investment option.
  • They are willing to accept a lower level of returns in exchange for safety and liquidity.

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Overnight fund taxability

The returns from overnight funds are taxed same as debt mutual funds. Short-term capital gains tax is applicable if the units are redeemed within three years of purchase, which is equivalent to investor’s tax slab. If the units are redeemed after three years, the returns are taxed as long-term capital gains, which is taxed at a flat rate of 20% after indexation.

If the investor chooses Income distribution cum capital withdrawal (IDCW) option, then the dividend income will be subject to tax.

Things to consider before investing in overnight funds

Overnight funds offer easy access to your cash while earning returns. But before diving in, consider these key factors to ensure they align with your financial goals and risk tolerance:

  • Overnight funds represent the safest category among debt funds, akin to a savings account, prioritising safety and liquidity over high returns.
  • Unlike schemes aiming for optimised returns, overnight funds offer relatively low returns but assure easy accessibility and security for investors' capital.
  • There exists variation among overnight funds regarding returns and expense ratios, requiring investors to assess and select funds with consistent performance and low costs.
  • While compromising returns for safety and liquidity, investors must align overnight fund investments with their financial goals and strategies rather than reacting solely to credit risks.
  • Diversifying investments across various debt funds based on risk appetite and investment horizon is prudent; for instance, while overnight funds offer safety, longer investment horizons may benefit from liquid or ultra-short duration funds holding high-quality bonds.


Overnight funds in India serve a specific purpose in the spectrum of investment options. They are an excellent choice for those who prioritise capital preservation, liquidity, and modest returns. While not suitable for wealth creation, they play a crucial role in safeguarding and growing surplus funds in a secure and liquid manner. As with any investment decision, it's essential to assess your financial goals and risk tolerance before choosing to invest in overnight funds, ensuring they align with your broader financial strategy.

To check the returns on your investment in overnight mutual funds, you can utilize the Bajaj Finance SIP calculator.

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Frequently asked questions

What is an overnight fund? is the minimum investment amount for overnight funds?

An overnight fund is a type of mutual fund that primarily invests in very short-term debt securities with maturities of one day, offering high liquidity and minimal interest rate risk.

Are overnight funds better than FD?

Whether overnight funds are better than fixed deposits (FDs) depends on your investment goals. FDs offer fixed returns, while overnight funds provide potential but not guaranteed returns, making them suitable for different purposes.

Are overnight funds profitable?

Overnight funds aim to provide safety and liquidity rather than high profits. Investors seeking low risk and easy access to their funds may find them suitable.

Who should invest in overnight fund?

Overnight funds are suitable for investors with short-term cash needs and a preference for low-risk, liquid investments, such as individuals looking to park surplus cash temporarily or meet short-term financial goals.

What is the minimum investment amount for overnight funds?

The minimum investment amount for overnight funds varies by mutual fund house.

Are the returns on overnight funds taxable?

Returns from overnight funds are subject to taxation. Short-term capital gains tax applies if units are redeemed within three years, taxed at the investor's income tax slab rate. For redemptions after three years, it incurs long-term capital gains tax at a flat 20% rate with indexation benefits.

Are overnight funds dependent on interest rate changes?

Yes, overnight funds' returns can be affected by changes in prevailing interest rates.

What are the benefits of investing in overnight mutual fund?

Benefits include low risk, liquidity, moderate returns and investment flexibility.

Who are these funds suited for?

Overnight funds are suitable for conservative investors looking for a safe parking place for their surplus funds for a very short duration.

Which is better, a liquid fund or an overnight fund?

It depends on your goals. Overnight funds offer slightly lower returns but unmatched liquidity (you can redeem anytime). Liquid funds offer potentially higher returns but with a slightly less flexible redemption window (typically 1 day exit load).

How long is an overnight fund?

The underlying securities in an overnight fund mature in one business day. Your investment remains in the fund until you redeem it.

What is the rate of interest of an overnight fund?

Overnight fund returns fluctuate based on market conditions. They typically offer lower returns than other debt funds due to their low risk profile.

Is there a lock-in period for overnight funds?

No, overnight funds does not have lock-in periods. You can redeem your investment on any business day. However, some platforms might have a small window (check their policy) after the cut-off time to cancel or modify your request before it is processed at the next day's NAV.

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