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Overnight funds, which are considered the safest category among debt mutual funds, have been seeing fresh interest from investors looking to shuffle their portfolios, a report by <a target="_blank" href="https://economictimes.indiatimes.com/markets/bonds/overnight-funds-back-in-demand-as-interest-rates-start-to-firm-up/articleshow/92192007.cms">Economic Times </a>stated.

With the stock market facing headwinds and interest rates expected to rise further, investors are parking money in overnight funds, where returns have increased to almost 5 percent from an average of 3 percent a few months ago, it added.

Since October 2021, when the market downfall started, investors have started using overnight funds to park money. As per ET, the number of folios in the category rose from 1.55 lakh in October 2021 to 5.85 lakh in May 22, with average assets under management (AUM) rising from ₹1.16 lakh crore to ₹1.36 lakh crore. In comparison, the debt MF AUM shrunk from ₹14.89 lakh crore to ₹13.62 lakh crore in the same time.

The report further highlighted that fund managers have also been recommending overnight funds to avoid mark-to-market loss as interest rates are moving up, while equity investors are putting money in this category for the preservation of capital, before bringing them back to equity.

"Overnight fund returns move with repo rate and do not carry any mark-to-market risk. That's why-risk averse investors park in this category," says A Balasubramanian, MD, Aditya Birla Sun Life Mutual Fund told ET.

He added that overnight funds are the safest among debt funds because they invest in securities with residual maturity of a day.

It is important to note that within the fixed income space, many investors prefer overnight funds as there could be a mark-to-market loss in the case of long-duration or gilt funds. In the past one year, investors have made 1.67 percent in corporate bond funds and 0.04 percent in gilt funds.

Meanwhile, Nirav Karkera, head of research, Fisdom told ET that the elevated market volatility, minuscule risk in this category and quick redemption timelines seem to have attracted direct equity investors seeking to temporarily park funds. Many investors who believe markets are still richly valued have booked profits in equity and are using overnight funds to park money and transfer that to equity funds when market valuations turn attractive, he further pointed out.

According to the ET report, Karkera expects further interest rate increases of 100 -120 basis points in the current financial year. The RBI has raised the key policy rate by 90 basis points in the past two months.

"If the expected hike is evenly spread across upcoming scheduled monetary policy meets, investors could earn an annualised return in the range of 5 percent to 5.5 percent," said Karkera.

Demand for Overnight funds increases as interest rate goes up: Report 

As per ET, the number of folios in the category rose from 1.55 lakh in October 2021 to 5.85 lakh in May 22, with average assets under management (AUM) rising from ₹1.16 lakh crore to ₹1.36 lakh crore.

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