Overnight funds are debt-oriented mutual funds that primarily invest in debt and money market instruments. As the name suggests, these instruments mature on or before the next business day. They include instruments such as TREPS, repo transactions and other overnight securities.

The fund collects money from investors and invests it for a very short period. When the underlying investments mature the next day, the fund manager can reinvest the proceeds again. This short maturity makes overnight funds less sensitive to interest-rate changes than long-duration funds. They also offer a lower overall level of risk.

Overnight funds aren’t meant for long-term wealth creation. They’re mainly useful when you want to park idle money for a short period. For example, if you have money that you need after a few days or a week, an overnight fund can be one option to consider instead of leaving your cash idle.

Overnight funds may suit you if:

• You have money you need after a few days: Maybe you have money set aside for rent, a fee payment, a credit card bill or another expense coming up soon. Instead of taking equity risk for such a short period, you can consider an overnight fund.
• You want to temporarily park a lump sum: Suppose you received cash as a gift from parents or relatives and are unsure where to invest it. You can use an overnight fund as a temporary parking option while you decide where the money should go.
• You want to use an STP to invest regularly: If you have a large amount of saved-up cash to invest in equity funds but do not want to invest it all at once, you can use the Systematic Transfer Plan (STP). For example, you could park the money in an overnight fund and gradually transfer a fixed amount into equity mutual funds.
• You want a relatively low-risk short-term option: As maturities are very short, interest-rate sensitivity is low compared with long-duration funds. For shorter-term needs, overnight funds can be useful. However, low risk does not mean zero risk.

When you put money in an overnight fund, it is pooled with other investors’ money. The fund manager invests those funds in eligible overnight debt and money market instruments.

These instruments mature on or before the next business day. The fund manager can invest that money again in similar short-term instruments. This cycle repeats.

One common instrument used by overnight funds is TREPS (Tri-Party Repo). It is a repo market arrangement used for short-term borrowing and lending against eligible collateral.

If the fund earns an annualised return of around 5.5%, the daily return would be very small. Your investment may increase by only a few rupees over several days. Overnight funds are designed for stability and short-term parking, not high returns.

Overnight schemes are debt mutual funds. For units acquired on or after 1 April, 2023, gains from specified debt funds are treated as short-term gains under Section 50AA and taxed at your applicable income tax slab rate. There is no indexation benefit for overnight mutual funds.

Here’s a quick glance at the taxability of overnight funds:

Note that the tax rules can change, so check the latest rules applicable to the scheme before investing.

Here are some benefits overnight funds offer you:

• Very low interest-rate sensitivity: The underlying investments mature on or before the next business day. So overnight funds have much less exposure to interest-rate movements.
• Low credit-risk exposure: The fund does not take the same kind of long-term credit exposure as many other debt funds. However, credit risk is not completely zero.
• No mandatory lock-in period: You can redeem your units when you need the money. Overnight funds do not have a statutory lock-in period.
• No exit load: These funds generally do not charge any exit load, unlike liquid funds that charge an exit load for withdrawal within the first seven days. However, you should always check the scheme’s details before investing.

You must consider the following risks that come with overnight schemes:

• Reinvestment risk: The fund keeps investing as its holdings mature. If short-term interest rates fall, the returns earned on new investments can also decrease.
• Returns are not guaranteed: An overnight fund is still a mutual fund. Its returns are not fixed or guaranteed by the mutual fund company, the RBI or the government.
• Lower returns: These funds are not meant to create long-term wealth. Their returns depend largely on short-term money-market conditions. Money-market rates can move within a range. So it would be misleading to assume that an overnight fund will always earn 6% or 7%.
• Not suitable for long-term goals: If you are investing for goals that are several years away, this fund may not be suitable as your main investment. For long-term wealth creation, you may instead explore suitable equity funds based on your risk level and investment horizon.

These debt funds are often confused, as all three are used for short-term debt investing. Here’s a quick comparison:

If you want to keep your money invested for longer, you can explore money market funds or low-duration funds. However, they carry more interest-rate risk, so you should not treat them as the same thing as overnight funds.

Since these schemes follow the same regulatory framework, there may not be many factors to consider when picking the best overnight funds. Still, here are a few things worth checking:

• Look at the expense ratio: When expected returns are relatively similar across funds, costs matter. A lower expense ratio can leave more of the fund’s return with you.
• Check the fund’s size: A larger AUM (Assets Under Management) can indicate that the fund is widely used, although fund size alone should not decide your investment.
• Check the portfolio: Look at what the fund actually holds and whether it follows the overnight scheme’s mandate.
• Compare direct and regular plans: While investing, compare direct plans with regular plans. Direct plans do not include a distributor’s commission and usually have a lower expense ratio.

The best overnight mutual funds should not be shortlisted based on any one factor. Compare funds across all factors and pick the one that best fits your requirements.

If overnight funds fit your needs, you can invest through the Million app in a few minutes:

• Download the Millions app from the Google Play Store or the iOS App Store.
• Enter your mobile number, provide basic details and finish KYC verification.
• Open the mutual funds section, search for overnight funds and select the scheme you’d like to invest in.
• Enter the amount of spare cash you’d like to invest.
• Confirm the details and authenticate the payment.

That’s all. Your overnight fund investment is set. Instead of letting your cash sit unproductive, overnight schemes give you a low-risk and high-liquidity option to park your money while earning some interest.

Once you've sorted your short-term cash management, you can explore longer-term options such as aggressive hybrid funds, multi-asset allocation funds, or index schemes like Nifty Bank funds and Sensex funds.