Basics of Overnight Funds

Understanding Overnight Funds

There is one type of mutual fund, which not many have heard of- overnight funds. It should be considered as an integral fund for the diversification of your portfolio. Here is everything you need to know about overnight funds.

What is an overnight fund?

An overnight fund is a debt mutual fund, which invests in bonds that have a maturity period of one day. The bonds are purchased at the start of the day when the Assets Under Management (AUM) will be in cash and they will mature on the next business day.

Once the bonds mature, the fund manager will purchase another bond for the day and so on. With every increase in the Net Asset Value (NAV) of the fund, there is an income in the form of interest.

Why should you invest?

When you invest in overnight funds, you diversify your portfolio and every day you have new funds in your bag. If there is a change in the interest rate, your fund will not be affected.

You will anyways be buying a new bond on the next business day. It has the shortest maturity period and you see the results on the immediate next day.

Who should invest?

Investors who wish to park their money into a fund with minimal risk should invest in the funds. Investors who are not worried about the results should invest in the fund and anybody who does not need a lump sum of money in one shot should invest in them.

Is there any tax liability?

The investment is made for one day; this means there will be a short-term capital gain on the redemption of the bonds and it will be taxed as per your tax slab. There is no long-term capital gain in overnight funds due to the nature of the fund.

Things to consider while investing

You need to keep in mind that you may or not may earn by investing in the funds. If the NAV falls, you might lose an amount in a single day.

Similarly, if there is an increase in the NAV, you will be able to earn the interest on the same. The trick is to choose the funds very carefully and keep a watch on the market. First-time investors might not want to invest in these funds.

How should you select an overnight fund?

You should select a fund based on its past performance and the expected results. Shortlist the funds and make a comparison of the performance and the results to make a wise decision.

It is advisable to choose funds that have minimal risk. Debt funds are mutual funds that invest into debt securities and the overnight fund is a type of debt fund with a maturity period of 24 hours.

The open-ended scheme is ideal for those investors who do not need immediate liquidity and wish to remain invested for a long period. It carries low risk and generates stable returns over the investment period.

What are the best overnight funds?

We have listed down few of the best overnight funds that you can think about investing. For more details, set-up your account and talk to our financial advisor today:

Common mutual funds investment mistakes

To ensure the investments you make help you toward a financially secure future, you must avoid certain investment mistakes that a lot of newcomers end up making. Mistakes such as:

No Proper Research:

A lot of investors start investing without properly understanding the product or schemes. They do too little or no research of their own or sometimes just listen to the investment pundits and carry out the investments. Once you have your financial goal, the next step is to start identifying an investing plan or scheme that will help you achieve that goal. If you are new to the world of Mutual funds, take advice from professionals, acquire knowledge and start slowly.

Not Checking Risk and Asset Allocation:

Lack of research about a particular scheme and its past performance always leads to bad investment decisions. Your decision to invest should depend on your financial goal, risk-appetite and investment period. Ideally, you should start investing in funds that are less volatile and check the long-term returns of those funds.

To read the entire list of common mistakes that you should avoid, check out 10 mistakes to avoid while investing in mutual funds.

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FundsInn is AMFI certified company that offers various services including Financial planning and Assets management. We recommend a personalised investment portfolio keeping your financial goals and investments in mind.

Our financial advisors understand your current financial status and suggest a financial plan that suits your needs. You can initiate different types of transactions including Lump sum investment, SIPs (Systematic Investment Plans), in various schemes available on our portal.

If you are looking for guidance then get in touch with our financial advisor and get started today.

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