What are Overnight Mutual Funds?

Mutual funds can be one of the investment vehicles to add to your investment portfolio. Mutual funds carry a dynamic portfolio of various assets, thus offering diversification. They have become quite popular in India in the recent past. Individuals who possess less knowledge about equity but seek capital appreciation through equity investments are considering investing in such mutual funds.

SEBI, the regulatory body of mutual funds in India, define them as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time.”

Mutual funds are further categorized based on several unique attributes like asset allocation, risk profile, investment portfolio, etc. so that investors are able to make a more precise and informed investment decision. Some of the major mutual fund categories include equity, debt, ETF, solution oriented, hybrid and index funds.

Today we are going to discuss overnight funds which come under debt funds.

What are debt funds?

While equity mutual funds predominantly invest in equity and equity related instruments, debt mutual funds invest in debt instruments. These funds invest in fixed income securities like treasury bills, call money, debentures, government securities, and corporate bonds, certificates of deposits, etc. A lot of individuals consider debt funds to meet short term goals like making the down payment of their new car, renovating their home, planning a vacation, or building an emergency fund etc. If you wish, you can remain invested in debt funds until your investment objective is met.

What are overnight mutual funds?

Overnight funds are those mutual funds that invest in fixed income securities that come with a maturity period of just one day. It is because of this that the fund manager has to buy new securities every day. These funds are usually considered by investors for parking building an emergency fund or a fund for medical expenses. An overnight fund is an open ended scheme which invests in overnight securities. Another good thing about overnight funds is that they offer your investment portfolio some liquidity.

However, before investing in overnight funds here are few things to keep in mind:

Investment objective: Remember that overnight funds are usually considered by those who have a short investment horizon or those who are looking to build an emergency fund. So if you are looking for an investment that may help you with long term capital gains, you may have to look out for another scheme.

Risk appetite: An overnight fund may be considered by those who have a low risk appetite. Hence, make sure that your risk appetite and investment objective syncs with that of the overnight fund you are planning on investing in.

Total Expense ratio: Total expense ratio is nothing but the fee an AMC levies on investors for owning the overnight fund. An expense ratio may not seem like much of a trouble while investing, but it may affect your capital gains at the time of redemption. Hence, do lookout for the expense ratio of the overnight fund before investing.

Fund management: Remember that the overnight fund you invest in should not only be owned by a reputed fund house, it should be managed by a reputable fund management. Overnight funds are actively managed funds, which means they involve daily active participation of the fund manager. Hence it is necessary that you invest in an overnight fund that hosts a team of experienced fund managers.

Now that you are aware about overnight funds and also know about a few things to keep in mind before putting your hard earned money in them, plan on investing? Do remember that do not rush to any investment decisions and if you are new to investing, please seek some professional advice.

Axis Overnight Fund

An open ended debt scheme investing in overnight securities

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.