What Are Overnight Funds and Why Short-Term Investors Prefer Them?

Have you ever heard of assets or securities that come with a one-day maturity period? This is what overnight funds are. They form a distinct category within ‘open-ended debt funds’ and emerged in 2018 as part of SEBI’s mutual fund reclassification initiative.

Considering their investor-friendly features, a large number of people are increasingly turning to these funds. This blog explains what an overnight fund is, its essential features and how to choose the right one.

Quick Synopsis 

• Overnight funds invest in securities that mature within one day, such as treasury bills and Certificates of Deposit (CDs). 
• Due to the short-term investment horizon, these funds carry low credit and interest rate risk.
• You can easily redeem and gain relatively higher returns than a savings account.

What is an Overnight Fund? 

An overnight fund is a specific type of highly liquid debt mutual fund that invests money in overnight securities and aims to offer stable returns while lowering risk for investors. These funds focus on securities that come with a one-day maturity period, making them an attractive option for investors seeking high liquidity and safety while earning a stable return.

Seasoned fund managers consider a rolling cycle to put money into one-day instruments. You can buy and send a redemption request of your choice during trading hours and the fund manager executes these orders daily.

How Does Overnight Funds Work? 

According to the SEBI regulations, overnight funds invest money in different debt securities with a maturity period of just one day. As a result, the fund's portfolio changes daily, with maturing securities being replaced by new ones.

The responsible fund managers consider replacement daily so investors can make consistent turnover. Additionally, the assets under management (AUM) experience steady growth due to the interest earned from these securities.

Overnight Funds Example 

Let us give an example to make the whole concept clear! Imagine you have ₹1 lakh and prefer to invest in an overnight mutual fund whose current Net Asset Value (NAV) is ₹ 1,000 per unit.

Now, calculate the number of fund units you would get:

₹1,00,000 / ₹1,000 per fund unit = 100 units

Suppose the next day, the NAV of the fund increases to ₹1,005.

Then, your investment value will be:

₹(100 x ₹1,005) = ₹1,00,500

This simply shows how these funds can generate modest yet comparatively faster returns.

Recent Updates Associated with Overnight Funds 

Starting June 1, 2025, SEBI introduced new cut-off timings for redemptions in overnight mutual fund schemes to streamline transactions.

1. In case of offline mode (physical requests): 

• If you submit your redemption request by 3:00 PM, you will receive the previous day’s NAV.
• Submissions made after 3:00 PM will be processed at the next business day’s NAV.

1. In case of online mode: 

• Submitting by 7:00 PM ensures you receive the same-day NAV.
• Requests submitted after 7:00 PM will be processed at the next business day’s NAV.

Key Features of Overnight Funds 

Beyond offering a short investment horizon, there are other key features that make these funds attractive to investors:

• Low-risk Profile: Since they mature in just one day, it reduces the fund’s exposure to risk, making it a low-risk investment option for investors who are seeking a better way to park their surplus income. 
• High Liquidity: As they come with a short maturity period, you can access your funds in one day or less, without bearing penalties, other fees or exit loads on overnight funds.
• Moderate Returns: You can expect stable returns by investing in overnight mutual funds, higher than your savings accounts but generally lower than liquid or long-term mutual funds.
• Reduced Volatility: As the money is invested for such a short period, changes in interest rates do not really affect the fund’s value much. This makes the fund stable, with very little fluctuation in its NAV.

Overnight Fund Taxation 

Like tax on other debt mutual funds, taxes are applied when you sell your units of these funds. According to the taxation rules from April 1, 2023, you would not receive any indexation benefit, regardless of the funds’ holding period. 

Gains from overnight funds are taxed as per your individual income tax slab. For example, if you fall into the 20% tax bracket, the returns you earn from these funds will also be taxed at 20%, along with any applicable cess and surcharge.

Tips to Choose the Best Overnight Funds in 2025 

Selecting the right overnight fund is not always easy. Keep the following factors in mind to pick the one that suits you best:

• Determine Your Investment Goal: You should have clarity of your investment objectives. Ask yourself whether they are aligned with the nature of these funds.  
• Check Past Performance: Though analysing past performance cannot predict future returns, this practice offers insights into a fund's consistency. Compare the performance of diverse overnight funds and identify those that have delivered consistent returns to remain on the safe side. 
• Evaluate Fund Manager’s Experience: Checking the fund manager’s experience, their approach to managing overnight funds and their track record is crucial, as they are responsible for navigating risks and aiming for better returns.
• Compare the Liquidity: These funds are developed to offer liquidity and that is why you prefer to invest in them. However, you should confirm that the fund you have selected maintains high liquidity levels. As a result, you can access your money without incurring any penalties or waiting period. 

Final Word 

Investing in an overnight fund is best suited for investors who have surplus cash and are looking for a financial instrument that is safe and also offers high liquidity. Instead of keeping their money in a savings account, they are willing to accept moderate returns with a low-risk profile.