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Overnight Funds 2022 – Overnight Funds Definition, Taxability & Advantages

Are overnight mutual funds a good choice of investment? Find out in our complete guide on overnight funds, how it works, it advantages & overnight fund returns.

Parking money for the short term?

Have you received a lump sum as a salary bonus or maturity/redemption/sale amount from an asset? Are you looking to park this amount for the short term till you figure out how to invest it? Overnight mutual funds are the solution. This article will discuss overnight funds definition, taxability & advantages.

What are overnight funds?

An overnight fund is an open-ended scheme that invests its money in overnight securities with a one-day maturity. Overnight funds are a subcategory under the broader category of debt mutual funds. These funds invest in securities such as overnight reverse repos, collateralised borrowing & lending obligations (CBLO), and other debt securities with overnight maturity. Now that we understand what is overnight fund, let us see how it works.

How do overnight mutual funds work?

An overnight mutual fund collects money from its investors and invests it on their behalf. Investors are allotted scheme units in proportion to their investment. The NAV of an overnight fund moves up or down depending on the value of the securities in the portfolio. However, as the maturity profile of securities is one business day, there is hardly any movement in the security value, and thus in the scheme NAV. The profit/loss of an investor depends on the movement of the NAV from the price at which the units were bought.

As the maximum maturity of the securities is one business day, the fund has securities maturing almost every day. The fund manager uses the redemption proceeds to invest in new securities. An investor can invest in an overnight fund through a lump sum or a systematic investment plan (SIP).

Advantages of overnight funds

Some of the advantages of investing in overnight funds include:

  1. Low-interest rate risk: As the maturity profile of the securities is just one business day, there is very low-interest rate risk in an overnight fund.
  2. Low volatility: A security bought today by the overnight fund will be redeemed tomorrow. With such a short holding period, there will hardly be any volatility in the security price.
  3. Low default rate: The securities are bought from financial institutions such as banks with very high credibility. Hence, there is a very low risk of default.
  4. High liquidity: As the securities held by the fund keep maturing every day, the fund has very high liquidity.
  5. Capital conservation: The fund’s objective is more to conserve people’s capital than generate returns on it.

Who should invest in an overnight fund?

People looking to park money for the short-term should invest in an overnight fund. For example, you have received a bonus from your employer. Your investment, such as a fixed deposit, has matured, or you have redeemed your equity mutual funds, or you have sold a property. You have recently changed your job and received some benefits like leave encashment and gratuity from your previous employer. 

You have received the payment from the above scenarios and are yet to figure out how to use/invest the proceeds. You can invest the money in an overnight fund in the interim period. Your ultimate aim should be to protect your capital rather than generate returns on it.

Things to consider before investing in overnight funds

Before you consider investing in an overnight fund, you need to be sure that you are investing the money for the short term. Your objective should be capital protection rather than earning returns on it. Overnight funds are good for investors who have a conservative risk profile.

Taxation of overnight funds

The taxation of overnight funds is similar to that of other debt mutual funds.

  1. Short-term capital gain (STCG) tax: If you sell your overnight mutual fund units before 36 months, the capital gain will be classified as short-term capital gain (STCG). The STCG will be added to your overall income and taxed based on your income slab.
  2. Long-term capital gain (LTCG) tax: If you sell your overnight mutual fund units after 36 months, the capital gain will be classified as long-term capital gain (LTCG). The LTCG will be taxed at 20% with indexation benefit or 10% without indexation benefit.

Overnight fund returns

Let us look at the performance of the top five overnight funds.

Scheme nameAUM (Rs. crores)3-months6-months1-year
BOI AXA Overnight Fund180.87%1.67%3.29%
HSBC Overnight Fund6360.85%1.66%3.27%
PGIM India Overnight Fund2380.84%1.65%3.26%
Mirae Asset Overnight Fund5330.84%1.65%3.26%
Mahindra Manulife Overnight Fund2980.85%1.65%3.25%


Note: The returns are as of 12th Jan 2022. The returns are for direct plans with growth option. The three months, six months, and one-year returns are absolute. The funds have been ranked based on one-year performance.


Overnight funds are an excellent avenue to park your funds for the short term. Money received as salary bonus or from maturity or sale of some asset can be parked in an overnight fund till you figure out how to invest that money. Overnight funds have low-interest rate risk, low volatility, and low default rate. If you decide to invest the money in an equity fund systematic investment plan, you can transfer money from the overnight fund through a systematic withdrawal plan.
To start investing in overnight mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

To read more on similar topics, click here:

Money Market Mutual Fund

Best Flexi Cap Funds

Best Balance Mutual Fund

Direct Mutual Fund

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