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What are overnight mutual funds?

Overnight funds are a new category of debt funds introduced in 2018 after the reclassification by SEBI. As per SEBI, overnight mutual funds are open-ended debt schemes that invest in overnight securities having a maturity of one day.

Overnight funds invest in Collateralized Borrowing and Lending Obligation (CBLOs), reverse repos and other debt securities with a maturity of one day. They have short investment horizons making it ideal for corporates to place their money for a day in these funds than a current account. These funds are less risky as the default risk, and interest rate risk is minimal. However, this also reduces the return from these funds. Hence this category of funds is not recommended for retail investors.

Overnight funds are highly liquid as investors can invest and redeem within the trading hours. These are taxed like debt funds. Short term capital gains (STCG) (gains within three years from investment date) are taxed at the investor’s income tax slab rate. Long term capital gains (LTCG) are gains if the investment is held above three years. These are taxed at 20% with indexation benefit. Dividends are taxable at the income tax slab rate of the investor.

overnight funds
overnight funds

How do overnight mutual funds work?

Overnight funds invest in Collateralized Borrowing and Lending Obligation (CBLOs), reverse repos and other debt securities with a maturity of one day. SEBI regulates these funds. Hence as per SEBI’s norms, the fund is not permitted to invest in securities with maturity more than one day. This helps in reducing the default risk in their portfolio. This is because it is highly unlikely that a security that is maturing the next day will default its interest payment. Hence the corporates holding these funds consider them as cash and cash equivalents.

The portfolio of overnight funds changes every day with fresh securities maturing the next day. The old securities are replaced with new overnight securities. At the starting of the day, the AUM of the fund is completely in the form of cash. The fund manager of the overnight fund invests in overnight securities. These securities mature overnight, and the fund manager uses this to buy new overnight securities. The AUM, however, increases slightly due to interest payment from the security. Hence the income for these funds is mainly in the form of interest payments rather than capital gains.

Also, the returns from overnight funds reflect overnight lending and borrowing rates. When interest rates fall, the liquidity is high, leading to a decline in overnight rates. In contrast to this, when interest rates rise, the money supply is tight, and the liquidity is low, leading to an increase in the overnight rates.

The objective of overnight funds

The main aim of overnight funds is to enable its investors to use their idle cash more efficiently. Overnight funds best suit investors who have idle cash for a couple of days before their working capital needs kick in. These funds aim to provide a platform for investors to earn that extra rupee on their cash reserves than leave it idle in their current account. The features of overnight funds below make the fund’s objective more achievable.

High liquidity: Overnight funds are highly liquid investments. They are considered equivalent to cash. Investors can enter and exit within the trading hours.

Low expense ratio: The funds come with a low cost attached to them. The investments are not actively managed. The expense ratio for these funds is usually below 1%, allowing it’s investors to make money on surplus funds at low cost.

Short investment horizon: The funds have a short investment horizon of one day. This increases the utilization of funds available at the investor’s disposal.

Low risk: With low maturity period comes low risk. The fund’s assets aren’t exposed to a lot of risk. The interest rate and default risk of the investment is low when compared to other investments.

Benefits of investing in overnight funds

These funds are for extremely short investment horizons. These funds are safe as they do not invest in high-risk assets. Following are some of the benefits of investing in overnight mutual funds:

Invest idle money: They are an excellent alternative to invest idle cash. They offer good safety as well as liquidity. Also, these funds offer higher returns when compared to a savings account.

Low risk: Since these funds invest in securities with one-day maturity, the chance of default is almost nil.

No hefty penalty: Unlike other safe investment options, overnight funds do not charge substantial penalties nor any exit loads. For example, fixed deposits charge a penalty for premature withdrawals.

Market Crisis: They are great investment options during a market crisis or period of uncertainty.

Emergency: These are highly liquid. Therefore, in times of a crisis, investors can quickly liquidate overnight funds.

Taxation on overnight funds

Taxation on these funds is similar to that of debt mutual funds. The rate of tax depends on the holding period of the investment.

Short term capital gains tax: Capital gains on an investment held for less than three years are subject to short term capital gains. The gains are taxed at the applicable income tax slab rate of the investor.

Long term capital gains tax: Capital gains on an investment held for more than three years are subject to long term capital gains tax. The gains are taxed at 20% with indexation benefit.

Who should invest in overnight funds?

Overnight funds are ideal for investors with a very short investment horizon. Investments in these can be for as less as one day. Therefore, investors with a holding period of less than a week can consider investing in overnight funds.

Also, they best suit corporates. They can invest in overnight funds rather than holding cash in their current account. Overnight funds are the best option for corporates to invest idle cash when they have a couple of days in hand before their working capital requirements.

Additionally, some retail investors use overnight funds to route their investments to equity funds. Through systematic transfer plans (STP), many investors move their investments from overnight funds to equity funds. However, for retail investors, liquid funds are a better alternative when compared to overnight funds. As liquid funds offer comparatively higher returns with similar interest rate and credit risk.

Things to consider before investing

These funds are the safest type of debt funds. It is very unlikely that a security that is maturing the next day will default its interest payment. However, certain things have to be kept in mind before investing in overnight funds.

  • Overnight funds do not offer very high returns. Overnight funds are just a good alternative to a savings bank account. The funds provide safety as well as good liquidity. Hence, these offer relatively lower returns.
  • Nonetheless, there is a reasonable amount of difference in terms of returns as well as expense ratio among the different funds in the market. Therefore, investors should be careful while shortlisting funds.
  • Overnight funds do not offer very high returns. However, they provide good safety and liquidity. Therefore, investors should invest based on their financial goals and not because of any news relating to a credit default. In other words, it might be good to have some investments in overnight funds. However, to avoid risk, one should not have all their investments in overnight funds.

Therefore, investors with low-risk tolerance and a longer investment duration of three months to six months can consider investing in liquid mutual funds. Liquid mutual funds or ultra-short duration funds are suitable for longer investment horizons. These funds that invest in high-quality securities will offer similar levels of safety to the investor as an overnight fund.

What are the other categories of debt funds apart from overnight funds?

Debt mutual funds are schemes that invest a significant portion of the corpus in fixed-income or debt instruments. For example, they invest in instruments such as government securities debentures, corporate bonds, and money market instruments like certificates of deposits, commercial papers, and treasury bills. Compared to equity mutual funds debt funds are low-risk investments. These funds asset allocation is such that they invest in high-quality instruments. Apart from overnight funds, the following are the other categories of debt funds,

  • Liquid Funds
  • Ultra Short Duration Funds
  • Low Duration Funds
  • Money Market Funds
  • Short Duration Funds
  • Medium Duration Funds
  • Medium to Long Duration Funds
  • Long Duration Funds
  • Corporate Bond Funds
  • Dynamic Bond Funds
  • Credit Risk Funds
  • Banking and PSU Funds
  • Gilt Funds
  • Gilt Fund with ten-year constant duration
  • Floater Funds

What are the categories of funds under equity funds?

Equity mutual funds are a type of mutual funds that have an asset allocation of at least 65% in stocks. Equity funds have a significant amount of risk associated with them. Hence the returns are higher in comparison to other types of mutual funds. The categories under equity funds are:

  • Large Cap Funds
  • Mid Cap Funds
  • Large and Mid Cap Funds
  • Small Cap Funds
  • Multi Cap Funds
  • Thematic / Sector Funds
  • Equity Linked Savings Scheme (ELSS – tax saver funds)
  • Focused Funds
  • Value Funds
  • Dividend Yield Funds
  • Index funds

To know more about mutual funds and their types and how they work, read our guide.


Overnight funds invest in securities maturing in one day. They provide an excellent opportunity for corporates to park their excess/idle money in them than a bank current account. Their benefits include high liquidity, low expense ratio, short investment horizon and low-interest rate risk. However, low risk means low returns. Overnight funds category accounts for close to 7% of the total assets in the Debt fund assets.

As mentioned above, this category is ideal for corporates as they are a better alternative to the current account. It is not considered as a good investment option for individuals or retail investors. Retail investors can look at liquid funds instead. They are a better option with similar credit & interest rate risk but higher return.

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Kotak Savings FundICICI Prudential Bluechip Fund
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Invesco India Growth Opportunities FundAxis Bluechip Fund
Mirae Asset Tax Saver FundICICI Prudential Savings Fund
Axis Liquid FundParag Parikh Long Term Equity Fund
DSP US Flexible Equity FundReliance Liquid Fund Growth Plan
UTI Nifty Index FundAxis Midcap Fund Growth
HDFC Index FundMirae Asset Large Cap Fund
SBI Ultra Short Term FundTata Liquid Fund
Canara Robeco Equity Tax SaverNippon India Growth Fund