Overnight Fund
An Overnight Fund is an open-ended debt mutual fund scheme that invests exclusively in overnight securities — instruments maturing the next business day — making it the lowest risk debt category with virtually no credit risk, no interest rate risk, and high liquidity.
Overnight Funds invest only in instruments that mature or are due to be repaid the following business day — primarily overnight reverse repos, Collateralised Borrowing and Lending Obligations (CBLOs), and T-bills with one-day residual maturity. Because the portfolio turns over completely every day, there is virtually zero interest rate risk (portfolio duration is effectively zero) and negligible credit risk, since counterparties in overnight markets are almost exclusively banks and government entities.
The returns of overnight funds closely track the RBI's repo rate. When RBI raises the repo rate, overnight fund returns rise; when it cuts, they fall. In a 6.5% repo rate environment, overnight funds have historically delivered around 6.0-6.4% annualised returns, marginally below the repo rate due to the expense ratio. This predictability makes overnight funds the closest mutual fund equivalent to a risk-free return.
Overnight funds do not carry exit loads, making them suitable for parking funds for even a single day. They are widely used by institutional investors and corporates for intraday cash management. For retail investors, the practical use cases are similar to liquid funds but with an even shorter-term horizon — surplus funds parked over weekends or holidays, initial investment before directing to a specific longer-term scheme, or as a source fund for an STP.
The return difference between overnight funds and liquid funds is typically 0.3-0.5% per year, with liquid funds offering slightly higher returns because they take slightly more risk (instruments up to 91 days rather than one day). For investors whose primary goal is absolute capital safety rather than return maximisation, overnight funds are preferable. For those comfortable with the marginally higher but still minimal risk of liquid funds, liquid funds may be more appropriate for parkings beyond a few days.
A key misconception is that overnight funds and savings accounts serve the same purpose. While both offer high liquidity and low risk, overnight fund returns are generally 1.5-2.5% higher than standard savings account interest rates in India, and gains from overnight funds (held for more than three years, post-April 2023 rule) are taxed as per the income slab, which is similar to savings account interest treatment.