Overnight Funds for Ultra Short-Term Goals – All You Need to Know


New Delhi (India), March 9: Overnight funds are a type of debt mutual fund that invests primarily in securities with a maturity of 1 day. This may make them suitable for parking funds you need access to almost immediately. Their returns are in line with prevailing overnight interest rates. Let’s understand more about these funds and how they can meet ultra-short-term goals.

What are Overnight Funds?

An overnight fund invests in debt and money market instruments maturing in 1 day. This includes tri-party repos, reverse repos, treasury bills, commercial paper, and certificates of deposit. Their portfolios have negligible credit risk as they invest in securities issued by governments, PSUs, and top-rated corporations.

You can earn better returns by investing surplus cash in overnight funds instead of savings accounts.

Key Features:

  • Invest in securities maturing in 1 day.
  • Negligible interest rate and credit risk.
  • Higher returns than savings accounts.
  • Suitable for parking funds needed overnight.
  • Offered by leading mutual fund houses.

Who Should Invest in Overnight Funds?

Overnight funds may be suitable for investors with idle cash that they may need access to immediately. Common scenarios include:

  • Corporates: To manage daily working capital needs and temporary surpluses.
  • Traders: To park funds while waiting for trading opportunities.
  • Retail investors: To hold funds for a few days when switching between investments.
  • Anyone: To earn better returns on funds held for ultra-short-term goals.

Given their low-risk profile, overnight funds, including conservative investors, can work for all investor types. They may potentially provide better returns than savings accounts without compromising safety or liquidity.

Returns Offered by Overnight Funds

Overnight funds generally deliver returns in the 4.5-5.5% range, similar to overnight call money market rates. For instance, Bandhan Overnight Fund has delivered 4.63% annualised returns since its inception (as of 31st January 2024). This is lower than liquid funds but higher than savings accounts.

When the RBI cuts policy rates, returns from overnight funds also decline. So, while absolute returns may vary, overnight funds may consistently deliver better post-tax returns than idle savings account balances while providing instant liquidity.

Taxation of Overnight Funds

Overnight funds come under the debt fund category for taxation purposes. Here are the tax rules if you redeem before 3 years:

  • Taxed at normal income tax rates.
  • Indexation benefits are not available.
  • No tax on dividends.

If you hold overnight funds for over 3 years, you enjoy indexation and 20% post-tax returns with indexation. This favours investors in higher tax brackets.

Understand Overnight Fund Risks

While overnight funds are among the safest debt funds, they still carry some risks, including:

  • Liquidity risk: Assets become hard to sell during tight money market conditions.
  • Interest rate risk: Changes in interest rates impact NAVs.
  • Credit risk: Default risk, though low, given the short maturities & high credit profile of holdings.
  • Regulatory risk: Changes in regulations may impact returns.
  • Exit load risk: Some funds levy exit load if redeemed early.


Overnight funds offer convenience, liquidity and potentially better returns for ultra-short-term money parking needs. They provide a sensible middle ground between savings accounts and bank FDs. Conservative investors may potentially consider placing a portion of their emergency corpus in overnight funds. Analysing factors like AUMs, expense ratios, and portfolio credit quality is advisable before investing.

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