When it comes to investing in mutual funds, most of us think about equity mutual funds, SIPs, or even Multi Asset Funds. But what if you want to park your money for just a few days, weeks, or even overnight? You would think about investing in Fixed Deposits, or simply your savings bank account so that the money is instantly accessible.
Parking your money in Savings Bank Account gives you a peace of mind or a sense of security, but it does not provide adequate returns. What if there was a way to keep your money accessible, and also earn better returns than your savings bank account? That is where Overnight Mutual Funds come into play.
In this article, we understand what Overnight Mutual Funds are, how they work, who should invest in them, and why they can be a smart choice for parking your emergency fund.
Quick Summary:
- What they are: Ultra-short debt funds investing in 1-day maturity securities🛡️
- Use case: Park cash for days/weeks or to build an emergency fund while staying liquid.
- Return edge: Historically higher than savings a/c and often above inflation over time (vs ~2.8% average savings rates). 📈🏦
- Access: Many offer Instant Access Facility (IAF) – money credited in ~30 mins, up to ₹50,000 or 90% of value (lower of the two), per day per PAN per scheme.⚡
- Taxes: Treated as debt funds – gains taxed at your income-slab rate. 🧾
- Best for: Conservative investors, idle cash awaiting deployment, emergency buffers, and corporate treasuries. 🎯
What are Overnight Mutual Funds?
Overnight Mutual Funds are a category of debt mutual funds that invest in debt securities with a maturity of just one day. Yes, the investments in these funds mature daily, and the fund manager reinvests the money in fresh securities that mature the next day. This process is repeated consistently.
This keeps the risk of default or loss in principal value due to interest rate fluctuations very low. In fact, overnight funds are considered the safest option amongst debt funds.
Where do Overnight Funds Invest?
Overnight Funds primarily invest in:
- Tri-party Repos
- Overnight Reverse Repos
- T-Bills and G-Secs maturing in one day
- High Rated Money Market securities that mature in one day
Ideal Investment Horizon
The name clears it all; Overnight Mutual Funds are meant for investing your money that you want to be liquid and quickly accessible. This means that if you are looking to park your money for a few days before transferring it elsewhere, parking surplus funds until you decide your next investment, or a portion of your emergency fund, overnight funds can be an excellent option for you.
It is to be noted that they are not ideal for someone who has an investment horizon for more than 15 days as there are other categories available that can be better. So, if you have a very short-term investment horizon or are not sure about when you will need the liquidity, Overnight Mutual Funds are for you.
Overnight Mutual Funds – An Upgrade to your Savings Bank Account
At this point, you might wonder, why not just keep my money in a savings bank account instead? Totally valid question! Let’s compare
| Particulars | 1 Year Return | 3 Year Return | 5 Year Return |
| Savings Account (Avg.) | 2.84% | 2.85% | 2.85% |
| Nifty 1D Rate Index | 6.22% | 6.50% | 5.30% |
| India Inflation | 4.19% | 4.76% | 5.26% |
Source: Nifty Indices, RBI, IMF, EduFund Internal Research
From this table you can clearly infer that Overnight Funds are an upgrade to your savings account. But then you would wonder that it takes up to 2 days for the redemption money to hit your bank account. So, trade the instant accessibility for higher returns? No, you don’t need to.
Instant Redemption Facility: Like Bank Account but with Higher Returns
So if you were also thinking that you would have to compromise on instant accessibility of funds for higher returns, you do not need to worry. Overnight Funds have the regulatory allowance to provide Instant Access Facility (IAF) and some fund houses offer this feature with their overnight funds.
Under this facility, you get the credit of the funds within 30 minutes to your registered bank account. It does not matter if you need it late night or early morning, if your bank account is active and linked, you would get the instant transfer. This facility is subject to ₹50,000 or 90% of your fund value; whichever is lower – per PAN per scheme.
This facility effectively makes your overnight fund behave like a bank account with higher returns, while still giving you access to your money in an emergency. So, if you are someone who is looking to maintain an emergency fund, overnight mutual funds can be an ideal investment option for you.
Here is a list of some of the Overnight Mutual Funds that currently offer Instant Access Facility:
- Aditya Birla Sun Life Overnight Fund
- Axis Overnight Fund
- DSP Overnight Fund
- Edelweiss Overnight Fund
- Nippon India Overnight Fund
Disclaimer: This list is not a recommendation. Always check the Fund SID to confirm this feature.
Let us look at the advantages and disadvantages of Overnight Mutual Fund
| Advantages of Overnight Fund | Disadvantages of Overnight Fund |
| Safety of Capital: Minimal Credit Risk as securities mature daily | Returns are not guaranteed and can depend on interest rates in the market. |
| Liquidity: You can redeem investments anytime. Some funds also offer Instant Redemption. | Overnight Funds are not ideal for wealth creation but only for parking short term investments. |
| Better Returns than Savings Account | Instant Redemptions has limit. You cannot withdraw all of your money at once. |
| No Lock in Period. No Exit Load |
Who should Invest in Overnight Mutual Funds?
Overnight Mutual Funds are suitable for:
- Conservative Investors who don’t want to risk their money but still want slightly better returns than their savings account or Short Term FDs.
- Investors with idle money waiting to be deployed in other assets.
- Individuals looking to build their emergency fund which is accessible when necessary.
- Corporates needing short-term parking of surplus cash.
Taxation of Overnight Mutual Funds
Overnight Mutual Funds are taxed similar as Debt Mutual Funds as they fall in the same category. Any gains, short term or long term are taxable as per the slab rate of the taxpayer.
Closing Notes
Overnight Mutual Funds are the safest and most convenient options for parking your emergency fund or short term money. They do not carry any volatility, and credit risk. For anyone who wants liquidity, safety, and higher returns than savings account, overnight funds are an ideal choice.
So, the next time you are on the lookout of an investment option to park your short term money, or your emergency fund, you know where to look.
Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
