All You Need to Know About Overnight Mutual Funds
Did you know you can invest in a mutual fund for a
day? Yes, you can invest for a day in an overnight fund.
What are Overnight Mutual Funds?
Overnight fund is a type of debt fund that invest
in overnight assets, or securities that matures in a day. SEBI introduced this
category in 2018.
As per SEBI’s norms, overnight funds need to invest
in securities such as Collateralized Borrowing and Lending Obligation (CBLOs),
overnight reverse repos, and other money market instruments that mature in one
day.
To keep the risk minimal, these schemes can’t
invest in risky debt papers. As the underlying securities mature within an
overnight, the scheme is extremely safe and aims to protect investors’ capital.
How does Overnight Funds work?
As overnight funds invest in very short papers,
these funds earn through interest paid on its holdings. The return of overnight
mutual fund is like the repo rate set by the Reserve Bank of India (RBI).
What are Benefits of Overnight Funds?
Here are some benefits of investing in overnight
funds:
Safest Mutual Fund:Overnight
mutual funds are the safest mutual fund, as it has minimal exposure to credit
risk and interest risk. Credit risk is risk that may arise from a borrower’s
failure to repay the loans or other obligations. As the underlying securities
of overnight funds mature within a day, it is rare for institutions to default
on interest payments.
Low expense ratio:As
fund managers don’t actively manage overnight funds, the expense ratio of these
funds are extremely low.
Better utilization of excess funds: Investors
with excess funds can use their funds better by investing their money in
overnight funds and earn returns.
Flexible investment option:
The open-ended structure along with low residual maturity profile of the
securities of overnight funds make these funds flexible investment option.
Who Should Invest in Overnight Mutual Funds?
- Investors who want to park their funds for a
very short investment horizon of less than one week can invest in
overnight mutual funds. Unlike liquid funds, it doesn’t have an exit load
for redemption of units within seven days.
- Investors who are looking for extremely safe
and liquid investment option.
- Investors who have surplus funds and want to
invest in equity funds systematically can invest in overnight funds and
opt for a Systematic Transfer Plan(STP) to transfer units from the
overnight fund to equity funds regularly.
Taxation on Overnight Funds
Just like other types of mutual funds, tax on
capital gain applies on overnight funds. The rate of tax on capital gains
depends on the holding period of the units. Short Term Capital Gains and Long
Term Capital Gains applies on a holding period of less than three years and
over three years, respectively.
If the holding period is up to 3 years:
Tax on short-term capital gains will apply if the investor stays invested in
the fund for up to three years. Short-term gains are added to the income of the
investor and taxed as per the income slab.
If the holding period is over 3 years:For
units held for over three years,fund houses consider gains as long-term capital
gains and investors get indexation benefits. So, before calculating the capital
gains, they adjust the cost of purchase for inflation. Later, the gains are
taxed at 20%.
Conclusion:Overnight funds are
good investment options for investors looking to park their excess funds for
less than one week. It is an extremely safe option. However, investors have to
keep in mind that the fund doesn’t aim to maximise the returns.
To know more, please consult us.This blog is purely
for educational purpose and not to be treated as an personal advice. Mutual
fund investments are subject to market risks, Read all scheme related documents
carefully.
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