Overnight Funds: Advantages and Who Should Invest?

Overnight funds are debt funds that invest in securities maturing in a day. These funds were introduced in 2018 after SEBI reclassified mutual funds.

These open-ended funds are safe, highly liquid, and can be an alternative to your current account.

Overnight funds invest the majority of the assets in:

  • Collateralized Borrowing and Lending Obligation (CBLOs)
  • Reverse Repos
  • Debt instruments with a maturity of one day.

Before we understand who should invest in these funds, let’s explore the benefits.

4 Benefits of Investing in Overnight Funds

1. High Liquidity

As the name suggests, these funds have a maturity of a day. Investment and redemption can take place within trading hours. You can park an idle lump sum amount in these funds instead of keeping it in your current account.

2. Low Risk

The underlying assets in these funds keep maturing every day. Since the interest rate will not change in a day, the risk is negligible.

Additionally, the chances of default for an asset maturing in a day are close to zero. Therefore, these funds are safe to invest in. 

3. Low Cost

Most debt securities charge exit load unless you hold your investment for a longer horizon. Even liquid funds expect you to hold your investment for at least 7 days to avoid exit load.

Overnight funds, on the other hand, do not charge any exit load. You can withdraw funds the next day. 

Moreover, these funds tend to have a low expense ratio of less than 0.5%. 

4. Flexible Investment Horizon

You can keep your money in overnight funds for as long as you want. While being able to redeem in a day is a great advantage, you can keep it longer as an emergency fund.

The redemption process is quick. Therefore, investors have the luxury of a flexible investment horizon. 

3 Things to Consider Before Investing in Overnight Funds

1. Risk vs Returns

Overnight funds are the safest debt funds to invest in. The possibility of default risk is close to zero.

However, investors have to compromise on returns in exchange for low risk. Overnight funds may not deliver superior returns. These funds are an alternative to your current or savings account.

2. Financial Goals

Overnight funds may not be an avenue to boost your portfolio returns. These funds make parking a surplus amount comfortable due to high liquidity.

Take your financial goals into account while investing. Don’t expect high returns. Rely on these funds for security and quick redemption.

3. Tax Implications

Since April 2023, tax implications on debt funds have changed.

Both Long-term Capital Gains (Investment redeemed after 36 months) and Short-term Capital Gains (Investment Redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit is only applicable to hybrid funds with at least 35% equity exposure. 

Explore Mutual Funds taxation rules here

Who Should Invest in Overnight Funds?

Overnight funds are suitable for investors looking to park surplus money overnight with no risk and high liquidity.

Ideally, these funds align more with the financial requirements of mid to large-size organizations than retail investors. Companies can park a large lump-sum amount overnight before reutilizing it. 

Retail investors can explore other debt funds before making a decision. Make sure the fund objectives align with your financial goals. 


Overnight funds offer several benefits such as daily maturity, low risk, low cost, and quick redemption. 

However, it is essential to note that high liquidity and safety come with comparatively lower returns. Corporations can benefit from these funds. Retail investors can use these funds as an alternative to a savings or current account.

We recommend analyzing your portfolio with your financial planner before making a decision. If you don’t have a financial advisor, VNN Wealth is just a call away.

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