Overnight Funds - Overview 2025
Overnight funds are rapidly penetrating the Indian mutual fund industry particularly amongst risk-averse investors and institutional investors seeking safe, liquid investments. These non-structured debt schemes put money in securities with a maturity of not more than one day. The high level of attractiveness of the overnight funds is due to the fact that they can be used by individuals and companies to temporarily keep excess cash in a temporarily better-paying, although temporary, form of a saving account.
With the regulation of the industry by the SEBI, the Indian mutual fund industry has experienced a steady growth of Assets Under Management (AUM) of the overnight funds due to a remarkable increase in awareness, ease of accessing digital accounts, and concentrated emphasis on securing liquidity and safety by the industry by the beginning of 2025.
How Do Overnight Funds Works?
Overnight funds are those that invest either in money market instruments and debt securities of one day only-loaning funds to either the government, banks, or top rated corporates in a 24 hour period. At the end of the day, the fund manager will invest the corpus in new securities to maturity next day so that there is no interest rate or credit risk of the longer-dated papers.
The returns made by the fund are usually as the accrued interest in such overnight loans. Due to the maturity and the daily redemption of the securities, there is a very high stability of the Net Asset Value (NAV) of the scheme.
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- Tri-party repos (TREPS)
- Reverse repos
- Government securities (T-bills that mature in 1 day)
- Senior deposits of high credit quality in short-term corporate deposits.
Why Are Overnight Funds Relevant in 2025?
A number of changes within the market have led to the increased popularity of overnight funds in India:
- Bond and equity market volatility.
- Tougher risk management rules by SEBI.
- The use of digital and fintech that simplifies the process of making investments.
- Growth in treasury activities of corporates and startups.
- Increased regulatory transparency of short term debt funds.
Overnight funds will offer a safe haven to both the institutional and retail investors amidst global and domestic financial uncertainty which is usually affecting the traditional short term and liquid funds.
Did you know?
As per AMFI data of early 2025, the two overnight funds combined got over nearby of 75,000 crore in AUM, representing a year-on-year growth rate of 12 percent.
What are the Main Characteristics or Priorities of Overnight Funds?
- Underlying security maturity: Strictly one day.
- Liquidity: Redemption proceeds normally made in one working day.
- Risk profile: Low credit and interest rate risk.
- Minimum investment: Only requires a minimum of Rs 500 in most online sites.
- Regulation: Generally under all SEBI guidelines of mutual funds.
- Expense ratio: It has one of the lowest expense ratios among the mutual funds in debt, typically less than 0.10 percent.
- Tax: Taxed as other debt mutual funds (capital gains according to holding period)
What are the Advantages and Disadvantages of Overnight Funds?
Advantages
- Safety: Low exposure to default or movements in the market since it matures on a daily basis.
- High liquidity: Money is readily available when required in case of an emergency or a business.
- Low cost: Extremely low management charges in comparison to other funds.
- Easy to operate: No lock-in, no entry or exit load.
- None of the mark-to-market risk: insignificant changes in the NAV.
Disadvantages
- Returns: The returns are usually smaller than those of liquid and ultra-short duration funds.
- No compounding of extremely short stays: The greater the less the benefits.
- Not very suitable in long term wealth creation.
- Lack of ability to fight inflation in the long run.
Experts Say:
Financial planners can recommend overnight funds as a place to keep money in the short term only. They cannot replace fixed deposits, equity or hybrid funds on medium to long term objectives.
Whom Should Think of Investing in Overnight Funds?
Suitable for
- Minimally risky investors.
- People who require secure means to deposit big amounts of money that they have sold assets, earned a salary or a bonus to spend a few days to few weeks.
- Firms that have to deal with daily surpluses or working capital.
- Trusts/Institutions where capital preservation is of the essence.
- Individuals who require urgent use of deposited funds.
Not Ideal for
- Shareholders who are focused on good profits.
- Investors who want to enjoy long-term capital growth.
- Those who are tempted by the regular dividend payments (since the dividend paid depends on the amount of interest earned rather than the actual profits).
Comparison Table: Overnight Funds vs Other Short Term Debt Funds
| Popularity | Overnight Fund | Liquid Fund | Ultra Short Duration Fund |
|---|---|---|---|
| Mean Maturity | 1 day | 0 to 91 days | 3 to 6 months |
| Risk | Minimum | Low to moderate | Low to moderate |
| Credit Risk | Negligible | Possible | Possibility exists |
| Returns (2024-25 avg) | 5.3% per annum | 5.75% per annum | 6.05% per annum |
| Exit Load | None | 0.007% (if <7 days) | 0.1% (if <7-30 days) |
| Redemption timeline | T+1 | T+1 | T+2 |
Quick Note: Quick note is the safest and most liquid with a possible low rate in a fast rising interest rate environment.
People Also Ask
Q: Can one keep money safe in overnight funds?
Yes, since the securities have maturity of a day, its risk of default is low.
Investing in Overnight Funds in 2025
- Go to your favorite mutual fund site or AMC site.
- Select an evening fund that has a good performance, low cost ratio.
- Register KYC, tie bank account and finalize e-mandate.
- Deposit the amount of desired amount (minimum Rs 500 or required).
- Monitor portfolio using mobile applications or web portals.
- The credits tend to be made within 24 hours (T+1 working day) to the bank account linked with the redemption.
- The unit holders are allowed to invest through lump sum and systematic transfer.
Did you know?
In 2025, many new-age investment platforms are enabling voice-activated SIP activation overnight funds, therefore, the first time it is quicker than ever.
What Overnight Funds Can You Expect to Earn in 2025?
According to the current repo rates and liquidity in the money market which is short-term, the gross annualised returns of overnight funds in India have been ranging between 4.9 percent and 5.6 percent over the last one year. This is higher that most of the public savings accounts but lower than the liquid fund in the less severe rate cycles.
The growth in NAV on a daily basis is very stable. The variability on returns is very low other than when liquidity is adjusted tremendously by RBI.
Projection for 2025:
Overnight fund yield: 5.3-5.5 percent per annum (after expenses ratio)
People Also Ask
Q: Can the negative returns be as a result of overnight funds?
Negative returns are exceptionally uncommon and can only be seen in exceptional circumstances like sudden big defaults or market closures- never seen in the last five years.
Overnight Funds Taxation in India
Over night funds will be subject to slab taxation on all holding periods (as is the case in other debt funds):
- Short term: Added to the income and slab taxable.
- None of the tenure benefits indexation.
- Dividends (where chose): Taxed at the hands of an investor at slab.
In these conditions, overnight funds are the most efficient to use by people with lower tax bracket or with the purpose of liquidity rather than tax arbitrage.
Expert Opinion:
The majority of high net worth investors tend to use overnight funds in their corporate treasuries or trusts as the issues of safety and liquidity are paramount over tax adjusted returns when it comes to ultra-short term.
At What Time Can You Use Overnight Funds?
Practical applications of the latter include:
- The reinvestment of a property is done after safe parking of a few days following the sale of the property or maturity of other investments.
- Funds that have been sitting idle in business are deployed temporarily.
- Increment of a sweep in/out mechanism of regular cash management in addition to current accounts.
- Corporate cash reserve held by the treasury which must be disbursed on short notice.
Note: During a period longer than 7-15 days, liquid funds have a higher yield, so one must be careful about comparing them.
Risks Associated with Overnight Funds
Although this is a very low risk, a few things must be taken into account:
- Systemic risk: Response to bankruptcy of clearing corporations or extreme market freeze.
- Regulatory risk: Alterations in fund taxation or fund structure.
- Operation risk: Slow settlement cycles with the RBI or technological glitches.
The cases of real loss are very unlikely due to the character of the underlying instruments.
People Also Ask
Q: Why is the overnight funds advantageous to the FDs?
In fact, redemption of overnight funds is quicker and can be done without any penalty as compared to term deposit which can be subject to a penalty.
How to Pick the Best Overnight Fund?
Search following the following:
- Good accessibility to capital at low costs.
- NVA consistency and size of fund across historical periods.
- Fund house and reputation processes.
- Online facilitation and accessibility.
- Quality customer service will be redeemed.
- The performance and rankings are also updated on a regular basis through independent fund research portal.
Overnight Funds Regulatory Framework in 2025
SEBI guidelines still regulate overnight mutual funds that need:
- Strict investment in 1-day residual maturity securities.
- Portfolio disclosure and NAV calculation on a daily basis.
- Segregation with liquid and ultra-short term and money market funds.
- No leveraged, derivative or high yield structures permitted.
This strong regulation environment has assisted in ensuring that overnight funds record zero default and fraud till 2025.
Did you know?
The regulator is in the process of making a centralised digital KYC of all mutual fund investors according to recent SEBI communications, which makes onboarding an even faster process in the case of ultra-short funds.
Quick Recap TLDR
- The overnight funds place investment only in securities that have a 1-day maturity- typically government or best rated repos.
- The returns are greater than savings accounts, less than the majority of the debt funds and all equity funds.
- Most appropriate as temporary parking of the funds, because liquidity is high and the level of risk is at the minimum.
- None of the lock-in or exit load, redemption is completed within 1 working day.
- The returns are consistent but not appropriate to the long term investment and inflation beating.
People Also Ask
Q1: The average amount of the returns on the overnight funds is what?
A1: In 2025, with the RBI policy, there will be an approximate 5.3 to 5.5 percent per annum in the returns.
Q2: Who is to invest in overnight funds.
A2: Any person who requires to store monies between 1-30 days, such as prior to making a significant payment, when buying a house or as liquid assets.
Q3: Do overnight funds outperform liquid funds.
A3: Overnight funds are safer under a period of less than 7 days. Over the extended durations, liquid funds might offer somewhat higher returns.
Q4: I want to know how fast I can recoup my investment.
A4: The settlement period is typically between 24 hours to the following working day (T+1 settlement).
Q5: Does overnight funds contain any lock-in period?
A5: No, there is no lock-in whatsoever. One can be redeemed at any time.
Q6: Does it have any minimum investment in overnight funds
A6: In 2025, most AMCs accept amounts of as low as Rs 500.
Q7: Does the financial institution impose a penalty on early withdrawal of the over-night funds?
A7: No, there are none, no penalties and no exit loads.
Q8: Are emergency fund appropriate with overnight funds?
A8: Yes, they can be called one of the best in the case of short-term emergency corpus because of immediate liquidity.
Sources
- Association of Funds Managers in India (AMFI)
- SEBI Mutual Funds Guidelines
- Economic Times Mutual Funds
- Mint, 2024-25, prospects of the debt mutual fund returns
