Are you searching for a debt mutual fund but confused about which one has low-risk and stable interest rates? Then you must be aware of overnight funds. Overnight funds are debt-based mutual fund schemes that invest in securities with a very short maturity period of one day.
Read this blog to understand what is overnight fund, its advantages and limitations, and how to invest in it. It will also provide you with extensive knowledge about the taxation on these funds.
What are Overnight Funds
Individuals must know what are overnight funds if they want to invest in debt-based mutual funds. An overnight fund is a category of open-ended mutual funds that puts money in debt securities and matures the next business day.
The Asset Under Management (AUM) keeps cash at the beginning of each business day. The fund manager then invests it in overnight bonds that mature the following day. This cycle continues as fund managers often utilise the cash amount to buy more bonds overnight. Investors can avoid risks and defaults by investing in these funds, as the securities mature in just 24 hours. However, this debt funds scheme offers the lowest return due to its low-risk profile.
Characteristics of Overnight Funds
Since you have understood what is an overnight fund, it is time to look at the characteristics of overnight funds. Below are some of the essential features of overnight funds:
- Short-Term Investment Horizon: An overnight mutual fund has a short-term investment horizon of just one day. This provides safety and liquidity to use the extra cash wherever you want.
- High Liquidity: Overnight funds invest in assets that allow you to convert the funds into cash just within a day by redeeming the units from the fund house.
- Low-Risk: Since the securities mature the next day, you will not face any major risks of defaults.
How do Overnight Funds Function?
Let us understand how overnight funds work by focusing on different aspects like how they make investments and how they protect funds from market volatility:
- Investments: Overnight funds invest in overnight reverse repos, Collateralised Borrowing and Lending Obligations (CBLO), and other debt instruments with a single-day maturity. Their entire holding includes cash and cash equivalents. Their portfolio is replaced with new overnight securities every day. The function of overnight funds is aligned with the SEBI guidelines, allowing them to invest in securities that only mature overnight.
- Earnings: The only source of income for overnight funds is interest from the debt instruments. However, there is no scope for getting capital gains as these category funds invest in debt instruments that mature within a day. The overnight lending rate is reflected by the returns from the overnight funds. Decreasing interest rates and the rise of short-term liquidity reduce the return on overnight funds.
Similarly, increasing interest rates uplifts investors’ returns from overnight funds. This makes it clear that the returns of overnight funds are almost similar to the interest rate regime.
- Risks: The SEBI regulations restrict the funds from investing in risky instruments to reduce the default chances. This makes it an attractive option for risk-averse investors with a conservative investment approach. These funds are not prone to risks due to movements in interest rates.
- Use of Idle Funds: Overnight funds are useful for investors who want to invest their idle funds. By parking the idle cash of investors in a short period, overnight funds provide higher returns to them, unlike bank deposits that have a longer tenure.
- Liquidity: Investors do not have to pay exit load charges since it has a shorter investment horizon. This low-cost and highly liquid investment approach makes investors withdraw from the investment during any emergencies.
- Approach for Market Volatility: Many debt funds are prone to the risks from changes in interest rates in the market. Longer investment periods or changes in credit ratings influence these risks. However, overnight funds change every day which allows them to protect investors from risks of interest rate fluctuations, and credit risk. This makes it different from the other debt funds.
Advantages of Overnight Funds
Overnight funds come with numerous advantages, like offering high liquidity for investors. Here are some advantages of investing overnight funds that can help you get safer returns:
- Enhanced Safety: Overnight funds are one of the safest investment options that have no credit risks and interest rate risks. You cannot make any gains or face losses on capital due to the investments in overnight securities.
Due to its maturing within 24 hours, overnight funds have almost zero credit risk. It is unlikely that securities defaulted on interest payments in one day. While comparing it with liquid funds, overnight mutual funds are safer.
- Flexible holding tenure: You can hold your investment as long as you want in an overnight fund. You can enter and exit from overnight funds very easily and earn market‐linked returns in your investment tenure.
- Less Expensive: You do not have to pay huge expenses while investing in overnight funds because they give less time for the management of debt holdings. Most of the overnight funds function with expense ratios of less than 1%.
Limitations of Overnight Funds
The overnight funds have a lot of limitations along with benefits. Here are some of the risks you should become aware of when investing in these funds:
- Sensitivity in Interest Rates: Overnight funds are vulnerable to sudden changes in interest rates. For example, If you invest in these funds in the morning and the Reserve Bank of India (RBI) lowers the interest in the afternoon, your returns will decrease immediately.
- Not Beneficial for Long-Term: If you want to invest for the long-term, then overnight funds are not ideal for you. The short investment tenure of these funds helps you get slightly higher returns than a savings account.
- Limited Control: You will not have the say in choosing debt instruments of your choice in overnight funds. The fund managers manage the portfolio and will not leave any space for you to make choices for investment.
- Credit Risk: Although it is less, you are not safe from credit risk. You could face a loss on your investments if there is a default made by the issuer of the underlying assets.
Taxation of Overnight Funds
It is always crucial to know every aspect of taxation when you invest in overnight funds. It is similar to any other debt mutual fund. The new tax rules have demonstrated that long-term and short-term capital gains are taxable based on an investor’s income tax slab if they make investments after April 1, 2023. However, these will change for investments before April 1, 2023.
If you redeem the funds before three years of investments, the realised gain is considered a short-term capital gain. It will be added to your total income and is taxable based on the income tax slab. On the other hand, if you withdraw the funds after 3 years, the realised gain will be a long-term capital gain (LTCG). The LTCG will be taxable at 20% with indexation benefits. You can avail this indexation benefit only if you have invested before April 1, 2023.
Who is the Right Investor for Overnight Funds?
It is essential to know why you should invest in overnight funds and how it is aligned with your investment philosophy. If you are considering investing in mutual funds for a short period, an overnight fund can be the best option for you. The changes in interest rates will not also affect your investments.
Additionally, if you are a risk-averse investor seeking returns in exchange for idle cash, you can choose overnight funds. Institutional investors will also get potential returns on the surplus funds after investing in these funds.
How to Invest in Overnight Funds?
Direct investment in overnight funds is available through the website of Asset Management Companies (AMC). You can also use your brokerage application and complete the KYC procedure. You may use the Torus Digital application to invest in overnight funds. Follow these steps to invest in overnight funds from Torus Digital:
- Step 1: Install the Torus Digital application from the app store.
- Step 2: Register yourself in the application with your mobile number and email ID.
- Step 3: Open your trading and Demat account by providing your Aadhaar, PAN, bank details, and digital signature.
- Step 4: After opening the trading account, go to the mutual funds section from the homepage. You will find more than 5000 mutual fund schemes.
- Step 5: Search for overnight funds and choose a scheme as per your investment criteria.
Top Indian Overnight Funds of 2025
You can see the top five Indian overnight funds of 2025 in the following table. However, the below-listed funds are not recommendations. The one-year and three-year annualised returns of the funds are updated as of March 20, 2025, and are subjected to periodic changes.
| Fund Name | AUM ( in ₹ crores) | Expense Ratio (%) | Annualised Return 1Y (%) | Annualised Return 3Y (%) |
| Quant Overnight Fund – Direct Plan – Growth | 171.19 | 0.15% | 6.77 | – |
| Bank of India Overnight Fund – Direct Plan – Growth | 64.83 | 0.08% | 6.73 | 6.34 |
| Axis Overnight Fund – Direct Plan – Growth | 7,828.07 | 0.05% | 6.69 | 6.29 |
| Tata Overnight Fund – Direct Plan – Growth | 3,610.09 | 0.06% | 6.68 | 6.27 |
| Nippon India Overnight Fund – Direct Plan – Growth | 6,838.54 | 0.08% | 6.67 | 6.27 |
Final Thought
Understanding what is overnight fund is essential for you if you are considering safe investment options with quick liquidity and positive returns. An overnight fund is a debt mutual fund that invests in debt securities that mature within one day.
Download the Torus Digital application and open a 3-in-1 trading account to invest in overnight funds. Torus Digital does not charge anything for the annual maintenance of your account.
