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What are Overnight Funds and How Do They Work

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As liquid funds faced challenges in recent times, investors turned to overnight funds for their attractive features. Providing higher returns and maintaining liquidity, these debt funds offer initial investment protection. 

Curious to learn more about their work and benefits? Read on to dive deeper into this lucrative investment avenue. 

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What do Overnight Funds intend to offer?

Overnight Funds intend to provide investors with better utilization of cash reserves through short investment tenures, high liquidity, and low risk. These features optimize surplus funds and ensure efficient and quick redemptions.

How do Overnight Funds Work?

Discovering how Overnight Funds operate and their investment potential requires insight into their allocation and income generation.

  1. Investment: These funds adhere to SEBI guidelines, investing solely in debt instruments like CBLOs and overnight reverse repos with one-day maturity, classified as “cash and cash equivalents.” Daily, new overnight securities replace the portfolio to minimize risk exposure.
  2. Source of Earning: Income comes from interest earned on debt instruments due to their overnight maturity, reflecting the overnight lending rate. Returns align with prevailing interest rate trends, impacting their performance accordingly.

What are the Benefits of Overnight Funds?

Overnight Funds offer multiple advantages, especially to retail and conservative investors seeking an alternative to traditional bank deposits.

  1. Safest Debt Fund: With minimal interest rates and credit risk, these funds focus on overnight securities, providing steady interest income without capital gains or losses.
  2. Low Cost: Operating with expense ratios below 1%, overnight funds are cost-effective due to passive management of debt holdings.
  3. Flexible Holding Period: Investors can easily enter and exit, earning secure, market-linked returns for their desired investment duration.

Who should invest in the Overnight Funds?

Overnight Funds suit those with short investment horizons, making them ideal for investors with goals of a week or less. They provide flexibility, allowing redemptions after just one day, offering an advantage over liquid funds. Additionally, investors can use Overnight Funds as a medium to shift capital, earning higher returns while preserving their principal.

What to Consider Before Investing in Overnight Funds?

Considerations for investing in overnight funds:

  1. Returns: While providing security and liquidity, like savings accounts, returns may be lower than other investments.
  2. Strategic Fit: Align overnight fund investments with overall financial goals and strategy, avoiding impulsive reactions to credit defaults. Prioritize capital protection and liquidity for idle funds.
  3. Long-Term Goals: Overnight funds may not be ideal for long-term financial goals; explore other options like liquid or ultra-short duration funds for better returns with quality bonds.


Overnight funds offer a secure and liquid investment option for short-term goals. While prioritizing capital protection, investors should align these funds with their overall financial strategy for optimal results.


Related Blogs: Are PSU Funds A Good Investment Option? | What is the Statement of Additional Information in Mutual Funds? | Decoding ESG Investing: The Future is Green | Who Is A Chartered Mutual Fund Counselor (CMFC)?

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