What is the meaning of overnight mutual funds schemes?

1. What securities are traded in the overnight market?

Overnight markets deal in overnight mutual fund schemes. The funds usually invest these investment inflows from the investors into overnight bonds. Such overnight bonds have one-day maturity. This essentially means no interest and credit rating fluctuation risk on the instrument. We shall talk about this in detail going further.

2. Who participates in an overnight securities market?

The most straightforward answer to this follows. Anyone wanting to park their extra funds without having to stress or worry. Worries relating to the volatile returns. Along with this the least amount of risk can go for overnight mutual funds. Not forgetting that the maturity period and the risk associated with such investments is really low. So the returns are also low in comparison to other available funds investing avenues.

3. How overnight securities market works?

At the beginning of each business day, fund managers purchase overnight bonds in the overnight market. In turn, investors purchase overnight funds from these mutual funds. These bonds or securities mature or redeem the next working day. Further, the funds would buy more overnight bonds from redemption inflow as a reinvestment and so on. Essential to note here that the reinvestment is done at the new rate prevailing on the next day.

4. Features of overnight securities market instruments

The key characteristics of such overnight mutual fund schemes are -

• These have a maturity of one day,
• They are the most liquid of all the investment securities available in the market,
• Have minimal to no risk because of their investment horizon and
• Lastly that they give comparatively better returns than when kept idle in a bank’s savings account.

What are the advantages and disadvantages of overnight securities

(i) Advantages of overnight mutual fund schemes

1. Effective utilization of surplus funds

Like we discussed above, where the investment period is as low as a day and the investor has surplus funds and wishes to keep them as liquid as possible while making better returns than idle funds in a bank account or the average return from fixed deposits, overnight mutual funds are the best possible option.

Thereby making it a good alternative with similar liquidity, lowest possible risk and better returns. The investments in overnight mutual funds are open-ended, each new investment matures the next business day and can be redeemed at any point of time which makes it a lot more attractive option to go for than close-ended options.

2. Ease of returns with minimal risk factor

We understand that some investor has the lowest investment period. They have a very conservation risk profile. Such investors would find it most suitable to invest in overnight funds. Therefore anyone with such investment portfolio requirements does opt to invest. Such invest in overnight mutual funds as the best available option.

3. Unaffected by the market volatility

Such overnight investments in debt securities are unaffected by the changes in the rates of interest by the Reserve Bank of India (RBI) or the change in any of the credit ratings of the borrower due to the short duration of the investment thereby making overnight funds practically free from any interest rate fluctuation risk, credit risk, liquidity uncertainty and the like. Any changes in interest rate will not affect your investment maturing the next day and any changes in the credit ratings of the issuer shall not affect your investments either.

4. Ease of decision making due to simplification and standardization

What does this really mean for an investor and how it is going to help them? The regulator in its circular mentioned above has clearly stated that from now on only one scheme per each category would be permitted (Refer image below for the extract from the circular). This means that every mutual fund will have only one scheme under the category of overnight funds making it much easier for the investor to compare risk-return parameters of each overnight fund scheme from different mutual funds and make an informed decision.

Also, now the funds are mandatorily required to align the maturity of such debt funds as per the category making it easier for the investor to transparently track its performance. Therefore more evidently than not, this re-categorisation is a win-win for the investors as this has made it an apple to apple comparison and not an apple to a mango!

(ii) Disadvantages of overnight debt mutual fund schemes

1. Overall feasibility for a small investor, the risk-reward analysis

This would probably be the one and only demerit of overnight mutual funds to highlight here, that although small investors look for liquidity but investing funds over a night, monitoring its performance for each day and getting involved into the processing parts before and after can be a bit too cumbersome. Such investors who look for liquidity and a reasonable amount of stability would not find overnight funds as feasible.

2. The enhanced/ better return factor is not as significant

Further considering that there is not much difference between the returns from an overnight mutual fund and that from fixed deposits or bank saving accounts, as these are not as higher in case of overnight funds as other market securities, this can be a con to some of the investors too.

Read our last blog for

“A beginners guide for debt mutual fund schemes investing in India”

What overnight mutual funds mean to a retail investor, are they really suitable?

Which overnight debt fund is better for your portfolio? 

1. HDFC overnight mutual fund

Portfolio composition varies among liquid and debt investments into the cash call sector.

2. SBI overnight mutual fund

Major portfolio composition includes money market instruments. Some floating-rate securities thereby implying regular income. Also, have a lower risk of fluctuations in the interest rate.

3. L&T cash mutual fund

Major portfolio composition is a mix of debt instruments as well as money market instruments.

4. UTI overnight mutual fund

Major portfolio composition includes government securities being treasury bills, the repos and the like. This clearly suggests no credit risk for your money at all.

List of overnight mutual funds in India

Where,

• DD = Daily dividend
• D = Dividend (annualized)
• MD = Monthly dividend
• WD = Weekly dividends
• PD = Periodic dividend
• G = Growth plan

Should you own an overnight debt mutual fund?