Overnight Funds are open-ended debt funds that invest in debt instruments with overnight maturity. This implies that either you withdraw your funds the next day, or the proceeds are used by the fund manager to invest in new bonds overnight for the portfolio that will mature the following day. You might believe you can multiply your money with these funds, but this is not the case. In reality, an overnight mutual fund's average yearly return is only 3.20 percent.
The goal of overnight funds is to allow investors to make better and more lucrative use of their cash reserves. The funds' risk exposure is kept to a bare minimum due to their short investment period and immediate maturity. These are the most liquid investment instruments. It allows investors to have quick and easy access to their assets.
READ MORE: What are Liquid Funds?
Advantages of Overnight Funds
The fund is a good alternative for investors who wish to put their spare money to work and generate a better return with less risk. These funds, unlike conventional bank savings and fixed deposits with long terms, allow investors to earn in a shorter period of time.
This fund is an open-ended liquid fund with a low risk profile. As a result, it's a good investment for individuals who don't want to take on too many risks. It also benefits investors who have a cautious approach to their investments.
Changes in the RBI's interest rates, as well as changes in a borrower's credit ratings, have little to no impact on these funds. Its short investment horizon shields investors from risks such as interest rate changes,market volatility, liquidity uncertainty and credit risk.
How are Overnight Funds Taxed?
Overnight funds are taxed in the same way as debt funds. Short-term capital gains tax applies to overnight fund units held for less than three years. Investors will be taxed in accordance with their income bracket.
Long-term capital gains (LTCG) tax is imposed at a rate of 20% on units of overnight funds held for more than three years.The benefit of indexation is delivered to investors. Dividends paid from overnight funds are taxed according to the investor's tax bracket (the classical method of taxing dividends).
Overnight funds are the safest type of debt investment. Before investing, however, investors should be aware of several fund characteristics. An overnight fund investment should be in line with the investor's economic plans and objectives, not just a response to recent credit defaults.