Overnight Funds
Overnight funds are debt mutual funds that invest only in securities maturing in one day, such as overnight repos, making them among the lowest-risk options for parking money for a few days.
What Are Overnight Funds?
An overnight fund is a debt mutual fund that invests in securities that mature in just one day. Under SEBI's categorisation rules, an overnight fund invests in "overnight securities having maturity of 1 day". Every business day, the money is lent for one day, repaid the next day, and lent again.
Because the money is never locked into longer-term instruments, an overnight fund has almost no interest rate risk and very low credit risk. Its returns closely follow the short-term interest rates prevailing in the money market, which in turn are influenced by the Reserve Bank of India's (RBI) policy rates.
Investors and businesses use overnight funds to park surplus money for a few days, for example, money received from a property sale that will be paid out next week, or a company's surplus cash over a weekend.
How Do Overnight Funds Work?
- Daily lending: The fund lends its money for one day, typically through Tri-party Repo (TREPS) on government securities and overnight reverse repo arrangements. In a repo, the borrower gives government securities as collateral.
- Repayment next day: The borrower repays the money with interest the next business day.
- Reinvestment: The fund reinvests the money for another day at the current overnight rate.
- Small margin buffer: SEBI allows overnight funds to deploy up to 5% of net assets in government securities and/or treasury bills with residual maturity of up to 30 days, only for placing as margin and collateral for certain transactions.
- NAV: Interest earned (minus expenses) is added to the NAV daily, so the NAV rises slowly and steadily.
Overnight funds follow the special cut-off timing and NAV rules SEBI applies to liquid and overnight funds; see Mutual Fund Cut-Off Timings for how this works.
Practical Example
A small business has ₹10,00,000 that it needs to pay a supplier in 10 days. It parks the money in an overnight fund earning an assumed 6% a year after expenses.
- Daily rate ≈ 6% ÷ 365
- Earnings for 10 days ≈ ₹10,00,000 × 6% × 10 ÷ 365
- = ₹60,000 × 10 ÷ 365
- ≈ ₹1,644
The business gets back about ₹10,01,644 (before tax). A savings account at a lower rate would earn less, and a fixed deposit may not be available or suitable for such a short period. The actual return depends on prevailing overnight rates and the scheme's expense ratio.
Why Are Overnight Funds Important?
- Capital stability: With one-day maturity, the NAV is very stable; a fall in NAV is rare.
- Lowest interest rate risk: Rate changes affect returns only from the next day, with no meaningful price impact on the portfolio.
- Liquidity: Useful for very short-term parking, sometimes for just a few days.
- Return expectations: Returns are usually lower than liquid or money market funds because the fund lends for the shortest possible period.
- Tax: Overnight funds invest almost entirely in debt and money market instruments, so they are "specified mutual funds" under income-tax law. Gains on units bought on or after 1 April 2023 are taxed at your slab rate, regardless of how long you hold them. Check the latest rules or consult a tax adviser.
Key Features
| Feature | Details |
|---|---|
| Portfolio maturity | 1 day |
| Typical instruments | TREPS and overnight reverse repo |
| Margin buffer | Up to 5% in G-secs/T-bills of up to 30 days residual maturity, for margin/collateral only |
| InvITs in residual portion | Not permitted |
| Interest rate risk | Negligible |
| Credit risk | Very low (collateralised lending) |
| Riskometer | Typically "Low"; check the scheme |
| Exit load | Usually none; check the scheme |
Benefits and Limitations
Benefits
- Very high stability of capital among mutual fund categories.
- Suitable for parking money for even a few days.
- Transparent and simple portfolio.
Limitations
- Lowest return potential among debt fund categories, as it lends only for a day.
- Returns fall when overnight interest rates fall.
- Gains are taxed at slab rates for units bought from 1 April 2023.
- Inflation can exceed post-tax returns, so it is not suitable for long-term savings.
Comparison With Related Concepts
| Concept | Portfolio maturity | Key difference | Practical implication |
|---|---|---|---|
| Overnight fund | 1 day | Shortest maturity | Lowest risk, lowest return potential |
| Liquid fund | Up to 91 days | Slightly longer instruments | Slightly higher return potential with very low risk |
| Money market fund | Up to 1 year | Money market instruments only | Suits horizons of a few months to a year |
| Ultra-short duration fund | Macaulay duration 3–6 months | Takes some duration and credit risk | Suits horizons of a few months |
| Savings bank account | Not applicable | Bank deposit, instant access | Interest fixed by the bank; deposit insurance applies within limits |
How Do Overnight Funds Apply to Mutual Fund Investors?
- Short parking: Use for money needed within days or a few weeks.
- Before an STP: Some investors park a lump sum in an overnight or liquid fund and move it gradually into equity using a Systematic Transfer Plan (STP).
- Compare costs: Because returns are low and similar across schemes, the expense ratio can make a visible difference.
- Check timing rules: Purchase and redemption timings affect which day's NAV you get; see Cut-Off Time and Applicable NAV.
Common Mistakes and Misconceptions
- "Overnight funds are the same as liquid funds." Correct view: overnight funds invest only in one-day securities, while liquid funds can hold instruments up to 91 days. Why it matters: liquid funds may earn a little more but carry slightly more risk.
- "Overnight funds have zero risk." Correct view: risk is very low, but returns change with interest rates and are not guaranteed. Why it matters: they are low-risk, not guaranteed-return products.
- "They are a good long-term investment." Correct view: returns roughly track short-term rates and may not beat inflation after tax. Why it matters: long-term goals usually need other categories.
- "Holding for more than three years reduces tax." Correct view: for units bought from 1 April 2023, gains are taxed at slab rates regardless of holding period. Why it matters: plan with post-tax returns in mind.
Important Terms to Know
- Debt Mutual Funds: Funds investing in bonds and money market instruments.
- Liquid Funds: Debt funds holding instruments up to 91 days.
- Liquidity: How quickly an investment can be turned into cash.
- Interest Rate Risk: Bond prices falling when rates rise.
- Mutual Fund Cut-Off Timings: Deadlines that decide the applicable NAV.
- Systematic Transfer Plan (STP): Periodic transfer between schemes.
- Expense Ratio: Annual cost charged by the fund.
Key Takeaways
- Overnight funds invest only in securities maturing in one day, mainly TREPS and overnight reverse repo.
- They offer very high stability but the lowest return potential among debt funds.
- Gains on units bought from 1 April 2023 are taxed at slab rates as specified mutual funds.
- They suit parking money for days or a few weeks, not long-term goals.
Related Glossary Terms
- Debt Mutual Funds
- Liquid Funds
- Money Market Funds
- Ultra-Short Duration Funds
- Mutual Fund Cut-Off Timings
- Systematic Transfer Plan (STP)
- Liquidity
References
- SEBI circular: Categorization and Rationalization of Mutual Fund Schemes (26 February 2026)
- SEBI circular text (PDF)
- Income Tax Department: Section 50AA, Income-tax Act, 1961 (specified mutual funds)
Educational Disclaimer
This article is published by FynnChintan Finserv, an AMFI-registered mutual fund distributor, for educational and informational purposes only. It is not personalised investment, tax or legal advice, and it does not recommend any specific scheme. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Regulations and tax rules change from time to time, so please check the latest SEBI and Income Tax rules, and consider your financial goals, risk profile and the scheme documents (or consult a qualified tax adviser) before making a decision.
To compare short-term parking options, explore our guides on Liquid Funds and Money Market Funds.
Frequently Asked Questions
How are overnight funds taxed?
Overnight funds are specified mutual funds because they invest almost entirely in debt and money market instruments. For units bought on or after 1 April 2023, gains are taxed at your income tax slab rate regardless of holding period. Check the latest Income Tax rules or consult a tax adviser.
Do overnight funds have an exit load?
Overnight funds usually do not charge an exit load, but this varies by scheme. Check the scheme information document or key information memorandum before investing.
What is the difference between overnight and liquid funds?
Overnight funds invest only in one-day securities, so interest rate and credit risk are minimal. Liquid funds can invest in debt and money market securities maturing up to 91 days, which can earn slightly higher returns but carry slightly more risk.
How long should I invest in an overnight fund?
They are designed for very short periods, from one day to a few weeks. For a horizon of a few weeks to a few months, liquid or money market funds may offer slightly higher return potential with low risk. Choose based on when you will need the money.
Where do overnight funds invest?
They invest in securities maturing in one day, mainly through TREPS (tri-party repo on government securities) and overnight reverse repo. SEBI also allows up to 5% of net assets in government securities or treasury bills with residual maturity of up to 30 days, only for use as margin and collateral.
Can an overnight fund lose money?
A fall in NAV is very rare, because the fund lends for only one day against collateral. However, returns are not guaranteed and depend on prevailing overnight interest rates and expenses. Overnight funds are among the lowest-risk mutual fund categories, but they are not risk-free.
This explanation is for general education only and is not investment advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.