Are overnight fund is a good choice for Short term investment?

Debt mutual funds are divided into different types of categories and most of these categories are characterized by the average maturity duration of the underlying assets. Long term debt funds invest in debt instruments which have an average maturity of 10-15 years while short term funds invest in instruments with a maturity of 5-10 years. Overnight funds, similarly, are debt mutual funds which invest in instruments with a maturity of only one day.

What is an overnight fund in India?

An overnight fund is a debt mutual fund which was introduced by SEBI in the year 2018. This fund invests in securities which have maturity duration of one day and hence they are called overnight mutual funds.

Features of overnight mutual funds

Here are the salient features of overnight mutual funds –

• The primary source of return for these mutual fund schemes is the interest income paid by the underlying security. Since these funds have a very short maturity period, there is no possibility of capital gains

• These funds invest in cash and cash equivalents like overnight repos, CBLOs, etc.

• If the interest rate is falling, the return of overnight funds decreases because of the increased liquidity in the market. On the other hand, when interest rates are rising, liquidity is limited and so returns on overnight funds increase

Are overnight funds good for short-term investments?

If you are looking to park your surplus funds for a very short time, i.e. for a few days, you can opt for the top overnight mutual funds. They give you the following benefits –

• They have a very low expense ratio, lower than 1%, giving maximum returns on your investments

• Since they are a type of debt mutual fund, they have no risk of market volatility

• Since the average maturity duration of the underlying assets is one day, there is negligible credit risk

• You can invest in overnight funds if you want to start an STP (Systematic Transfer Plan) into a mutual fund scheme and redirect your investments into equity in a systematic manner

So, if you have a very short term investment horizon, you can consider investing in an overnight fund in India. However, if your investment horizon is longer, i.e. you want to invest for a few weeks or months, liquid funds would be a better alternative as they would give you better returns than overnight funds.

Tax implications of overnight mutual funds

Being a debt mutual fund scheme, overnight funds have the following debt taxation –

• Returns earned within 36 months of investment are called short term capital gains. Such gains are taxable at your income tax slab rates

• Returns earned after 36 months of investment are called long term capital gains. You get the benefit of indexation on such capital gains and they are taxed @20%

However, since overnight funds are meant for short term investments, their returns would most likely be short term capital gains and would be taxed at your income tax slab rates.

Top overnight fund in India

Here is a list of the top overnight mutual funds which you can consider if you want to invest for a short term period –

Name of the fund	1-year return*	3-year returns*	5-year returns*
UTI Overnight Fund	3.74%	4.98%	5.98%
L & T Overnight Fund	3.71%	5.33%	5.95%
SBI Overnight Fund	3.69%	5.26%	5.75%

(*Returns as on 2nd November 2020) (Source: https://www.etmoney.com/mutual-funds/debt/overnight/59) 

Choose the top overnight mutual funds only if they meet your investment goals and if you want a short-term avenue for parking your funds. To invest, you can choose the best personal finance website of ETMONEY. ETMONEY offers you the ease of investing online which makes it the best personal finance website. Moreover, there is no commission involved and you can get your KYC verification online through scanned documents. So, choose ETMONEY’s best personal finance website and invest in overnight mutual funds for short term investments.