What are overnight funds? Its Advantages and Disadvantages.

Irrefragably, with the increased awareness about mutual funds, people are falling for them.

It is due to the diversely available selections where a person can choose the one that fits to their objectives.

And one such type is overnight mutual funds, which shall entertain the limelight in this write-up.

We would discuss in detail about their salient features and its pros and cons as well here.

Owing to the poor performance of liquid funds, more and more investors have turned towards the overnight funds that offer high liquidity.

What sparked this shift from liquid to overnight mutual funds? How are they profitable?  And there are lot other queries.

So, with no further delay, let’s dive into it pronto!

What are Overnight Mutual Funds?

These are basically open-ended type of debt mutual funds.

This implies an investor can invest into these schemes whenever they want, and they are perpetual in nature.

As the name suggests, these types of mutual funds are meant to mature within 24 hours, thus making them a favourable option for short-term investors.

How do Overnight Mutual Funds work?

The investment pool is subsequently capitalized into the debt securities such as corporate bonds, debentures, government bonds, municipal bonds, etc.

The financier who intends to invest in such plans give a purchase and redemption request for their preference during the trading durations.

Now, the mutual capitals are used to buy bonds overnight, which then mature the following business day.

Here, a person may release their levitated returns or if they do not, the fund managers sponsor the money to other bonds overnight and the sequence goes on continually.

Salient features of Overnight Mutual Funds

Here are certain characteristics that will help you better comprehend the penetralia of these mutual funds.

And you will be more able and clear as to go for it or not, and whether it suits your requirements well.

High liquidity

These funds are the well regarded for their tremendously liquid investment securities. The investors can easily liberate their funds with no hassles.

The Shortest maturity period of 1-day

The fund managers invest the collected investments exclusively in the securities that maturate in one day. And this is definitely the shortest maturation period in mutual fund policies.

Low returns

Since, this is a short -term policy, that is just a day. Therefore, the returns do not flaunt really high returns in contrast to long-term type schemes.

Lesser risks

The feature of being a short-term scheme comes in handy to lower the risks like credit risks, default risks and so forth. So, your heart is unlikely to miss a beat!

Considerable option for emergency funds

All thanks to great liquidity of overnight mutual funds, that makes it a thinkable option as regards to emergency funds or medical standby.

Ideal investment alternate for short term

If you are seeking an investment alternate for long-term, then, it is a go-go, here.

It proposes short-term capitalizing options, cull it.

So, these were some attributes of overnight mutual funds.

Now, a well-informed decision involves weighing the gains and risks involved in the matter.

And this makes it logical that we now walk through the pros and cons of the said funds.

Here we scoot!

Also Read: Exchange Traded Fund (ETF) vs Fund of Funds (FOF): What’s The Difference?

Advantages of Overnight Mutual Funds

As you now know that these funds are investment options exclusively for short time.

Further, they also shield from the risks such as credit risks, default risks, and interest rate variations.

Enumerated below are the advantages of these funds in detail:

A great buffer against market volatility

The highs and lows of the market are one of the most intimidating factor to the investors. Being a short-term investment, it virtually never sees risks like unreliable market, credit risks, interest rate fluctuations, and uncertainty regarding liquidity of funds.
The interest rate changes reified by the Reserve Bank of India or the by the borrower does not have any effect on the overnight funds.

A low-risk aspect

We just mentioned the gain of zero risks regarding interest rate changes and others, which make it the most secure alternate to invest for short term.

The funds collected are directly capitalized into overnight debt securities solely, which does not earn any capital gain or loss.

Rather, whatever the growth is procured happens owing to interest costs.

If you are a low-risk appetite investor, you may surely go for these open-ended funds.

Sounder usage of idle money

Now, if you have extra wealth slouching in your treasures, it is better to invest it in these funds.

Since, it would help you grow it with the least perils involved.

The policy enables you to enhance your profits in lesser time.

Easy liquidity

This is one of the other factors which the overnight funds can brag about proudly.

As an investor, you can easily access your funds in any urgent scenario or whatever.

Moreover, there is no entry or exit load, yeet!

Arbitrary holding period

Overnight funds are open-ended, which gives the investor flexibility to remain in the scheme for as long as they want.

The entry-exit in the investment does not bother, while you make safe returns on your capital for the duration you are engaged in it.

Disadvantages of Overnight Mutual Funds

Just like everything in the world, Overnight funds have a downside too.

Here are disadvantages of these funds which you should retain before deciding upon anything.

The return aspect is quite unsatisfactory

Although, the option stands robust in terms of risks and high liquidity, still the returns an investor receives are not much pleasing.

There is an insignificant difference between the returns from a fixed deposit or savings account and an overnight debt fund.

It comparatively pretty low and hence becomes a turn-off for some investors.

General viability for a minor investor

Another con of these funds is that although an investor is procuring the benefit of liquidity, but he/ she has to observe its performance every day.

This can be quite agitating for them.

The investors who fundamentally seek liquidity and consistency may duck this option.

Bottom Line

So far, we discoursed overnight mutual funds, their advantages, and disadvantages.

We elaborated in detail how they can be a great option for short-term investments, that enables returns with low risk.

However, you should avoid it in case you are anticipating considerable stability and high returns.

Keeping oneself informed in financial can save and earn you a lot.

So, carry on your learnings and debunking of the misconceptions around mutual funds and other pecuniary matters.

Further Reading:


Team R Wealth

Team R Wealth

Related Posts

Leave A Reply

Your email address will not be published. Required fields are marked *