Overnight Funds vs. Fixed Deposits: Which Is Right for Your Short-Term Goals?
When it comes to parking surplus cash for a short period, Fixed Deposits (FDs) have long been a household name in India. However, with the evolution of financial markets, Overnight Mutual Funds have emerged as a compelling alternative. Both serve the purpose of safeguarding capital while earning modest returns, but they differ significantly in their structure and benefits. Let's compare them to help you decide which is the better fit for your short-term financial goals.
What are Fixed Deposits (FDs)?
A Fixed Deposit is a financial instrument offered by banks and NBFCs where you can deposit a lump sum amount for a predetermined period at a fixed interest rate. The returns are guaranteed, and the principal is considered safe, making it a go-to option for conservative investors.
What are Overnight Funds?
Overnight Funds are open ended debt mutual funds that invest in overnight securities with a maturity of just one day. The primary goal of an overnight fund is to provide high liquidity while minimizing interest rate and credit risk, making it an ideal place to park cash for a few days to a few weeks.
Key Differences between Overnight Funds and FDs
Liquidity:
Overnight Funds: Offer superior liquidity. You can redeem your investment on any business day, and the money is typically credited to your bank account the next working day (T+1).
FDs: Have a lock-in period. Withdrawing prematurely often may incur a penalty, which reduces the net return on your investment.
Returns:
Overnight Funds: The returns are not fixed but are closely linked to the rates in the Tri-Party Repo (TREPS) market, which is the market for secured overnight lending.
FDs: Offer a fixed, predetermined interest rate for the entire tenure. You know exactly how much you will earn, providing certainty of returns.
Risk:
Overnight Funds: Carry very low risk. Since the portfolio is renewed daily, they are largely insulated from interest rate fluctuations and credit defaults.
FDs: Are also considered very low-risk, and the deposits up to ₹5 lakh per bank insured by the RBI's Deposit Insurance and Credit Guarantee Corporation (DICGC).
Taxation:
Overnight Funds: The short-term or long-term capital gains are added to the total income and taxed according to your applicable income tax slab rate.
FDs: The interest you earn is classified as "Income from Other Sources." This interest is added directly to your annual income and is also taxed at your applicable income tax slab rate. Banks are required to deduct Tax at Source (TDS) if your interest income exceeds ₹40,000 in a financial year (₹50,000 for senior citizens).
Conclusion
The choice between an Overnight Fund and an FD depends entirely on your needs. An Overnight Fund is a good choice if you need high liquidity for an emergency fund or a temporary cash surplus. However, if capital preservation and assured returns are your priority, then a Fixed Deposit (FD) is a better option. An FD is also a good choice if you have a specific sum of money that you can set aside for a fixed period.
Disclaimer - Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Published on Oct 6th, 2025