What Is an Overnight Fund?
An overnight fund is a type of debt mutual fund that invests in securities maturing in just one day. This means the portfolio is rolled over daily, minimizing interest rate risk and credit risk. Since the underlying instruments are highly liquid and short-term, these funds are considered one of the safest mutual fund categories.
Investors typically use overnight funds for:
- Parking surplus money for a few days.
- Managing liquidity between transactions.
- Avoiding idle cash in bank accounts.
Why Choose Overnight Funds?
- High Liquidity
You can redeem your investment anytime, and the money is usually credited to your account within one business day. - Low Risk
Since the securities mature overnight, there’s negligible exposure to market volatility or credit defaults. - Better Returns Than Savings Account
While returns are modest, they often beat traditional savings account interest rates.
Taxation: LTCG on Mutual Fund Investments
Even though overnight funds are low-risk, they are still subject to mutual fund taxation rules. Here’s how it works:
- If you hold the fund for less than 3 years, gains are treated as short-term capital gains (STCG) and taxed as per your income slab.
- If you hold for more than 3 years, gains qualify as long-term capital gains (LTCG on mutual fund) and are taxed at 20% with indexation benefits.
However, given the nature of overnight funds, most investors use them for very short durations, so STCG usually applies.
Who Should Invest in Overnight Funds?
- Businesses and individuals with temporary surplus cash.
- Investors looking for a safe place to park funds between investments.
- Those who prioritize liquidity and capital safety over high returns.
Final Thoughts
An overnight fund is not about wealth creation—it’s about convenience, safety, and liquidity. While it won’t make you rich, it ensures your idle money earns a little extra without risk. And if you’re planning to hold for a longer period, keep in mind the rules around LTCG on mutual fund investments. For short-term parking, overnight funds are one of the smartest choices in today’s financial landscape.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.