Overnight Mutual Funds- What Are They and How Do They Work?

Overnight Mutual Funds- What Are They and How Do They Work?

As the financial world continues to evolve, investors are presented with an array of options to grow their wealth. One such option that often flies under the radar but deserves a spotlight is Overnight Mutual Funds. Overnight mutual funds can be one of the diversified investment options for all investors, residents, and Non-Resident Indians (NRIs) both. In this blog, we’ll look to explain overnight mutual funds, explore what they are, how they operate, taxation and more.

What are Overnight Mutual Funds?

Overnight Mutual Funds, as the name suggests, are funds that specialize in investments in overnight securities or assets that have a maturity of one day. These are open-ended debt funds where the fund manager invests the cash into overnight bonds. In overnight mutual funds, the entire Assets Under Management (AUM) of the fund are maintained in cash to perpetuate the cyclic process of investing in overnight bonds and ensuring maturity next business day. As per the SEBI guidelines, the Net Asset Value (NAV) of the units in these funds is applicable until 12:30 pm while for redemption the timings are 1 pm. 

Also read: What is the Difference Between Open-Ended and Close-Ended Mutual Funds?

How do Overnight Mutual Funds Work?

The mechanics behind Overnight Mutual Funds are similar to what the names suggest. These funds primarily invest in short-term instruments such as overnight reverse repos, collateralized borrowing and lending options, and other debt or money market instruments. The process lies in the quick turnover of these securities, often maturing within a day and being replaced each day with new overnight securities. This characteristic not only ensures high liquidity but also enables fund managers to adapt swiftly to market changes.

Overnight mutual funds earn from the interest payments on their debt holdings. Since these funds mature within a day, there is no scope for capital gains. Essentially, the returns generated by these funds mirror borrowing rates and overnight lending. In instances where interest rates decrease and short-term liquidity is plentiful, market overnight rates also decline, and conversely, they rise when conditions shift.

Also read: Best SIP to Invest in 2023 – Top 10 SIP Mutual Fund Plans for NRIs

Benefits of Overnight Mutual Funds

  • Safety and Stability: In the unpredictable world of finance, Overnight Mutual Funds offer a steady ship. Their focus on short-term, low-risk instruments provides a level of safety that resonates with risk-averse investors.
  • Liquidity on Demand: Need your funds in a pinch? Overnight Mutual Funds have your back. Their short-term investments mean that you can convert your funds into cash quickly, making them an attractive option for those who value liquidity.
  • Diversification: By investing in a variety of short-term instruments, these funds offer a built-in diversification strategy. This diversification helps manage risk and provides a well-rounded investment approach.

Also read: 10 Mutual Funds That Doubled Wealth In 5 Years

Who Should Invest in Overnight Mutual Funds?

Overnight Mutual Funds are tailor-made for those who prioritize stability over high returns and have short-term financial goals. Investors who need quick access to their funds without sacrificing safety will find these funds particularly appealing.

Also read: Top 5 NRI Mutual Funds for Retirement Planning 2023

Factors to Consider Before Investing in Overnight Mutual Funds

Before you invest in Overnight Mutual Funds, there are a few factors to consider. Keep an eye on interest rates, as these funds are sensitive to changes. Understand the expenses associated with managing the mutual fund, and make sure they align with your overall financial strategy.

Also read: Top 5 Tips for NRIs to Pick a Winning Mutual Fund

Taxation on Overnight Mutual Funds

Overnight mutual funds are open-ended debt funds and they are taxed as per the taxation on debt funds. The debt mutual fund tax has been changed with effect from April 1, 2023, after the Budget 2023 brought certain amendments. Debt mutual funds will no longer be allowed to avail of indexation benefits from FY 23-24. Any gains made on debt mutual funds investment will now attract taxation on applicable slab rates of the investor’s income bracket.

As for the dividends, they are subject to taxation based on the investor’s income tax slab without any lock-in period, and the mutual fund will withhold tax at source according to the relevant tax rates prior to payouts or reinvestment. However, investors have the option to claim a tax credit for the taxes deducted at source when filing their annual returns.

Wrapping Up

Overnight Mutual Funds play a unique and vital role in the investment landscape. Whether you’re a seasoned investor looking to balance your portfolio or a newcomer seeking a safe haven for your money, Overnight Mutual Funds offers a diversified investment option.  

Also read: How to Make 1 Crore in 10 Years by SIP?

Can NRI Invest in Mutual Funds in India? 

Yes, NRIs can invest in mutual funds in India. NRIs can easily invest in different mutual fund schemes and generate higher returns and wealth building. The FEMA Act, RBI rules, and SEBI guidelines govern the rules and regulations regarding NRI investments in mutual funds which is why it has a slightly different procedure than that of resident individuals. However, it is very easy to set up your Mutual Fund KYC and link it to your NRO/NRE bank account to invest in mutual fund schemes in India. 

There are various mutual fund schemes available for NRIs to invest in. Keeping in check with the FEMA Act, the funds on offer for NRIs from the US & Canada to NRIs from other countries may vary at times.

How to Invest in Mutual Funds as NRI? 

NRIs can now download the SBNRI App and choose to invest in different mutual funds for NRIs scheme in India with ease. You can also get detailed investment advice from experts at SBNRI. Also, visit our blog and YouTube channel for more details.

SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.


What are Overnight Mutual Funds?

  • Overnight Mutual Funds are a type of mutual fund that invests in short-term debt securities with extremely short maturity periods, often overnight. These funds provide a safe and liquid space for investors looking for stability.

How do Overnight Mutual Funds differ from other mutual funds?

  • Unlike long-term mutual funds, Overnight Mutual Funds focus on short-term debt instruments with quick maturities. This short duration enhances liquidity and allows for swift adaptation to market changes.

What types of securities do Overnight Mutual Funds typically invest in?

  • Overnight Mutual Funds primarily invest in short-term instruments such as overnight reverse repos, collateralized borrowing and lending options, and other debt or money market instruments. These securities offer both safety and liquidity.

How do interest rates affect Overnight Mutual Funds?

  • Overnight Mutual Funds are sensitive to changes in interest rates. When interest rates fall and short-term liquidity is abundant, overnight rates in the market also decline, and vice versa.

Can investors redeem their units at any time with Overnight Mutual Funds?

  • Yes, investors can generally redeem their units at any time. The short-term nature of the underlying securities ensures high liquidity, allowing for quick access to funds.

How is the Net Asset Value (NAV) calculated for Overnight Mutual Funds?

  • The NAV for Overnight Mutual Funds is calculated daily, and the cut-off timing for its applicability regarding the purchase and redemption of units is a crucial consideration.

What is an open-ended fund?

  • An investor may contribute to, redeem from, or leave an open-ended mutual fund at any time. It has no set maturity time frame.

What are mutual fund types according to structure?

  • Open-Ended Funds, Close-Ended Funds, and Interval Funds

How can NRI invest in Indian Mutual Funds?

  • An NRI can invest in Indian Mutual Funds using his/her NRE/NRO Account. The NRE Account is used to invest on a repatriable basis and the NRO Account is used to invest on a non-repatriable basis.

Can I invest from the USA in India?

  • Yes an NRI can invest from the USA in India in various asset classes such as FDs, Mutual Funds, Stocks, etc.

Can NRI invest in SIP in India?

Copy link