An overnight fund is a type of debt mutual fund where investors’ money is parked into various money market instruments which have a maturity of just 1 day. It is an open-ended mutual fund scheme by virtue of which an investor can quickly put and withdraw their money whenever they wish to. 

Overnight funds are invested in overnight assets, or securities with a residual maturity of one day. This is a new category of debt funds that was introduced as part of SEBI’s mutual fund reclassification exercise in 2018. 

Participants in an Overnight Fund transaction 

• Lenders  

These are the investors in overnight funds, who may be retail investors, institutional investors, banks, and other institutions. 

• Mutual Fund house  

This is an overnight mutual fund in which people have invested, and the fund is ready to lend this sum at some predetermined rate of interest. 

• Borrower  

A market is never complete if there isn’t a person or institution ready to perform an action opposite to yours. In the case of overnight funds, one of the primary borrowers is a bank. 

• The Clearing Corporation of India Ltd (CCIL)  

Since you don’t know the seller in person, there is a clearing and settlement house in stock markets which ensures that the security is delivered to you and the money is delivered to the seller. In the case of Overnight Funds, The Clearing Corporation of India Limited is responsible for the matchmaking of lender and borrower and even for the settlement of transactions overnight. 

Why should you invest in Overnight Funds? 

• Liquidity  

These funds are highly liquid as the invested funds are not lent for an extended period of time in addition to the one-day short residual maturity of invested securities. 

• Safest Debt Fund 

Since overnight funds invest in overnight securities only, there is no chance of making capital gains or losses. The value of the fund does not show volatility but increases slowly due to interest income. Overnight funds have near-zero credit risk too‐ as it is highly unlikely for securities maturing in one day to default on interest payments 

• Flexible holding period: 

An investor in an overnight fund can hold his or her investment for as long as necessary. It is easy to enter and exit the investment while earning safe, market‐linked returns for the duration of the investment. 

Why should you not invest in Overnight Funds? 

• Not designed to optimize return 

overnight funds are not designed to optimize returns. Instead, they are akin to a savings account, in the sense that the investment is safe and can be readily withdrawn. Thus, overnight funds as a category tend to offer relatively low returns 

• Compromise on returns in exchange for safety and liquidity. 

investors in overnight funds have to compromise on returns in exchange for safety and liquidity. Therefore, investment in an overnight fund should be consistent with the investor’s financial goals and strategy, and not merely a reaction to recent episodes of credit default. 

Overnight funds are ideal for those with an extremely short investment horizon. These mutual funds are safe as they are not exposed to high-risk assets and securities. Therefore, risk-averse investors may consider investing in these funds.