What are Overnight Funds? Benefits & Taxation

After the COVID-19 pandemic, most investors started investing in overnight funds. As it’s a secure option and also provides a slight profit on the invested money. But do you want to know what overnight funds are actually? This post will help you with the overnight funds and all the other aspects of it. Hence, read it thoroughly if you know about the new debt fund category introduced in 2018 with the SEBI’s Mutual Fund reclassification.

What are Overnight Funds?

Overnight funds are the type of open-ended debt funds invested for the maturity of one business day. The fund manager invests the cash into overnight securities and overnight assets. SEBI or Securities Exchange Board of India also has defined this term as the open-ended debt funds that get invested in overnight assets or securities. At the beginning of the business day, an investor can invest cash into securities. And with their investment, they can get a slightly more return on their invested money.

What are Overnight Funds

How Do Overnight Funds Work?

Before you start investing in overnight funds, you also need to understand how it works.

1. Where Your Money Invested

Your money gets invested into overnight securities like CBLOs, overnight reverse repos, and other types of debt funds. Your fund must be in the form of cash, and it’s equivalent to investing in such a fund with the help of a fund manager. And the overnight fund’s portfolio keeps changing every day, and it keeps getting invested in significantly less risky debt securities.

2. How It Earns

Once the investment is made, then the overnight funds make a profit through the interest payments. Here the securities mature in one day, and the borrower pays the RBI’s predefined interest rate or the rate decided as per the market trend.

Like this, overnight mutual funds work and help investors to generate some money.

What’s The Goal of Overnight Funds Investment?

You may think about why these funds exist and why investors invest in overnight securities. This fund came out to reserve the investor’s money securely and profitably. It is a secure investment option, and there is minimal risk associated with this investment. Below are some common goals that an investor can think about and decide to invest in such securities.

1. Low-Risk Level

In this option, the amount gets invested in the debt funds and has a short investment horizon. Thus, there is minimal exposure to the risk and keep the loss to the very minimum.

2. Brief Investment Period

The investment horizon is minimal; it is just one business day. And investors who have extra cash in their pocket can utilize those to get some additional balance.

3. Highly Liquid

These funds are one of the highly liquid securities for investment. You can invest your additional money for a short time and convert them again into cash.

Benefits of Overnight Funds

In many ways, overnight securities are beneficial for investors who want to invest their money for very little time. As they do not need to face enormous risks, and they can also get minimal returns.

1. Utilize Your Additional Fund in Better Ways

For some investors, overnight mutual funds can be a great option. They can utilize their additional money to get the benefit. They do not need to wait here as they do in savings and fixed deposits. Here they can get increased returns in a day and utilize the earned profit for better use.

2. There is a Minimal Risk Factor

It has very few risk factors associated with it. You can consider it an almost zero risk-oriented investment option. If you want a less risky option than other liquid funds, there are overnight securities to invest in.

3. Market Volatility Does Not Impact It

The RBI defines the interest rates, or they can fluctuate a bit as per the credit ratings of the investors. And because of it and its short investment horizon, it stays far from market instability and gives a comparatively safe return.

4. Highly Liquid

You do not need to compromise with the principal amount of your investment if you need to withdraw in an emergency. There is not any exit and barrier that make it a highly liquid option for the investors. And hence it has gained massive popularity as a great investment option among investors.

Who Can Invest in Overnight Funds?

If you are an investor willing to invest your money in the share market just for a short time, then you can invest in these funds.

1. Investors Willing to Invest for a Short Time

Some individuals have the excess amount that they want to invest to earn some profit. However, they prevent entirely regular investment and trading options. But with this investment option, they can hold their money in the mutual funds for one business day and invest it in debt funds. So they can earn approx 3% on their principal amount and enjoy a minimal increase in it.

2. Willing to Hold Their Money to Invest in Equity

Some investors show their interest in investing in the equity funds, and hence they need to reserve their amount. In that case, they can use the overnight funds as the short time investment option. So they can keep their money and get some additional amount to purchase a maximum number of equity shares.

What’s The Tax Treatment of Overnight Funds?

Like the other debt funds, the overnight funds are also eligible for taxation purposes. And hence you need to pay the tax, but it can be either short term capital gain tax or long term capital gain tax. If you keep your money for three years, in that case, you need to pay the tax under long-term capital gain. You need to pay the 20% tax of your gains if you use the indexation. However, if you do not use the indexation, you can pay 10% of the tax amount from your gains. But you need to make sure you are paying the tax on the pre-described tax slabs by the government. Moreover, if the investor treats their overnight funds as the dividend option, they must pay around 29% of the gain.

Things to Check Before Investing in Overnight Funds

There are some key things that you should check before you invest in the overnight funds. Below are a few points you must consider when you assume to invest in such funds to keep your investment secure and profitable.

The overnight funds are akin to traditional investment options like your savings account. They are here to offer you small returns and keep your money reserve for the next investment option. You get a low return because they are highly secure, and you invest in debt funds. However, with the modest variation, the return can be different. Compared to other investment options, it is less risky and gives an ideal performance.

There is a minimal risk, but still, there is risk involved in it and when you invest in such a scheme. Then you put your hard-earned money at risk, and hence you should do proper research before you spend your money.


So, in this article, we learned about overnight funds, how they work, it’s advantages and many more. However, if you were also looking for an investment option that has low risk. Then you can also consider it and get a slight increase in your principal amount. But while investing, you need to act as an investor likewise and only choose the best overnight securities based on your research.

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