Overnight Funds: Parking Spot for Short-Term Cash

Ever had that feeling when you have some extra cash, but you're not sure where to put it for a short while? The extra cash may be for saving up for your yearly insurance premium, a new phone, or for a weekend getaway. You want it to be low risk, but you also want it to earn a little something more than your savings account.

Enter Overnight Funds. Think of them as the short-term parking spot for your money. 

What are Overnight Funds? 

Imagine you lend a friend ₹100 for a day, and they return it the next day with a tiny bit of interest, say ₹1. Now, what if you could do this every single day with a large pool of money? That's essentially what an overnight fund does.

These are debt mutual funds that primarily invest your money in government-backed securities that mature in just one day. This means the money is lent out and returned with interest on the very next business day. Because the time frame is so short, the risk of anything going wrong is relatively low. 

How Do These "Overnight" Things Actually Work?

It's quite simple, really.

1. You invest your money: You put your money into an overnight fund.
2. The fund manager gets to work: The fund manager takes all the money collected from investors and invests primarily in government-backed securities with maturity of 1 day and the invested money is received back the next day along with the interest.
3. The lent amount is repaid with interest: The very next day, the investor gets the money along with a small amount of interest.
4. The cycle repeats - This daily cycle of lending and getting repaid with interest is what helps your money grow steadily every single day.

Overnight Funds: Why They're Great for Short-Term Goals

So, what makes these funds a great choice for your short-term savings?

• Low Risk: Because the investments mature in just one day, they are not affected by the ups and downs of the stock market or changes in interest rates.
• High Liquidity: "Liquidity" is just a fancy word for how quickly you can get your money back. With overnight funds, you can typically withdraw your money anytime without as there is no lock-in period or exit load. This makes the fund ideal for emergencies or planned short-term expenses.
• Potentially Better Returns than a Savings Account: While they won't make you rich overnight, they generally offer slightly better returns than a standard savings account (assuming savings bank interest rate is lower).

Let's Talk Real Numbers: A Simple Example with a ₹1000 SIP

Let's say you have a goal to save up for your annual life insurance premium of around ₹12,000. You decide to invest ₹1,000 every month into an overnight fund through a Systematic Investment Plan (SIP).

A SIP is like a recurring deposit for mutual funds – you invest a fixed amount regularly.

Here’s a hypothetical look at how your investment might grow over a year. For this example, let's assume an annual return of 5%, which is a reasonable expectation for overnight funds, though returns are not guaranteed.

Disclaimer: This table is for illustrative purposes only and assumes a constant rate of return throughout the year. Actual returns may vary. The redemptions in this fund will be taxed as per the tax slab of the investor.

As you can see, by the end of the year, you would have invested ₹12,000, and it could have grown to approximately ₹12,331. This extra amount is the earning from your investment, which you wouldn't have received if the money was just sitting idle.

Things to Keep in Mind

While overnight funds are fantastic, there are a couple of things to be aware of:

• Expense Ratio: Like all mutual funds, overnight funds charge a small fee for managing your money. This is called the expense ratio. Look for funds with a lower expense ratio as it can impact your overall returns.
• Taxation: The gains you make from overnight funds are taxed as per your income tax slab.

Who Should Consider Using Overnight Funds?

Overnight funds are a great fit for:

• Conservative Investors: If you are someone who prioritizes the low risk of your money over high returns.
• Short-Term Savers: If you are saving for a goal that is just a few days, weeks, or months away.
• Emergency Fund: It can be a good place to park a portion of your emergency fund, as it is easily accessible and can be withdrawn at any given point of time.
• Planned and Periodic Known Expenses: Think about those predictable bills that come up once or twice a year—like your child's school fees, your car insurance premium, or the money you're setting aside for an upcoming festival or holiday. Instead of just letting this cash sit in your savings account doing almost nothing, you can put it into an overnight fund. This keeps the money at relatively low risk and liquid, so it's ready the moment you need it. Plus, it earns a little extra for you in the meantime, which always helps.
  
  We hope this gives you a clear picture of overnight funds and how they can be a valuable addition to your financial tool kit for managing your short-term goals. Happy investing!

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.

Please consult your tax advisor before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Publieshed on July 20, 2025