Since the RBI announcement on the repo rate increase, overnight funds, considered being one of the safest debt mutual fund categories, are seeing a fresh influx of investors. As the stock market continues to give mixed signals about bullish trends and interest rates expected to rise further, investors are starting to park their money in overnight funds.
As the demand for overnight funds is on a rise, many investors would like to know if this is the right investment avenue in current times. Here, we will try to address this question and talk about the benefits plus aspects to keep in mind before investing in these funds.
Overnight funds are debt mutual funds that invest in assets with overnight maturity. This category of debt funds was introduced in 2018 and has since gained popularity among debt fund investors.
Some of the securities that these funds invest in include:
The funds follow a short investment horizon and are therefore sought-after by corporates who would like to park their funds for a day to gain some returns instead of retaining in current accounts.
What do the statistics say about rising demand for overnight funds?
The stock market downfall has been visible since October 2021. This is also the timeline when investors are seen to be shifting towards overnight funds to park excess funds. As per a report published by ET, the number of schemes in the overnight fund category jumped up from 1.55 lakh in October 2021 to 5.85 lakh currently.
Today, the average assets under management (AUM) of these schemes combined have risen to Rs. 1.36 lakh crores. As against, the overall debt mutual fund AUM dropped to Rs. 13.62 lakh crores during this period.
Source : Livemint
Since overnight fund returns move in sync with repo rates, investors are better off investing in these debt funds as compared to other funds. Some of the other benefits offered by these funds are:
Although overnight funds are the talk of the town lately, investors must note the following points before investing in them:
Investors who are looking to invest in an overnight fund to benefit from the current interest rate hike, here are two criteria that can be used for short listing the right funds:
When interest rates were doing southwards, debt fund investors made substantial returns. Now, as we battle with inflation and the central bank struggles to revive the economy, the policy repo rate is being adjusted upwards. Experts believe that, in the short term, the RBI may raise rates in a staggered manner. Thus, as rates rise, it is wise to switch to short-term funds like overnight funds instead of long-term debt funds.
There is no standard minimum amount required for investing in overnight funds and it depends on the specific scheme or norms set by the fund house.
After short-listing the right scheme, an investor can either directly approach the fund house for investment or invest via a reputed online mutual fund platform.
Overnight funds can be included in a portfolio to balance the overall risk and returns and achieve portfolio diversification to some extent. This can especially be beneficial in scenarios where the interest rates are rising and stock markets are unpredictable.
Both retail investors and corporate houses use overnight funds to park their excess funds in a safe, risk-free avenue with predictable returns and high liquidity.
Overnight funds invest in overnight securities and these form part of the debt fund category. Therefore, earnings from these are subject to short-term capital gains tax as per an individual’s income tax slab rate. Long term gains from these funds are eligible for indexation benefits.
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