Last Updated on May 9, 2025 by vanessa sequeira
In certain investment strategies, capital efficiency is just as important as return potential. Overnight Mutual Funds follow a disciplined approach where, at the start of each business day, the entire corpus is held in cash. The fund manager then deploys this amount into overnight securities, which are typically bonds that mature the very next business day. As these securities mature, the proceeds return as cash, and the cycle repeats. This rolling structure allows investors to earn steady, low-risk returns without locking in capital, making overnight funds an attractive option for short-term liquidity management and cash flow optimisation. In this blog, we’ll examine what overnight mutual funds are, the list of best overnight mutual funds, their features, advantages and more.
Table of Contents
List of Best Overnight Mutual Funds
| Name | AUM (Cr.) | CAGR 3Y (%) | Expense Ratio (%) |
| Bank of India Overnight Fund | 46.10 | 6.46 | 0.08 |
| Axis Overnight Fund | 9,112.66 | 6.41 | 0.05 |
| Nippon India Overnight Fund | 7,323.41 | 6.40 | 0.08 |
| Mirae Asset Overnight Fund | 864.44 | 6.40 | 0.07 |
| Tata Overnight Fund | 3,256.45 | 6.39 | 0.06 |
| HSBC Overnight Fund | 2,709.89 | 6.39 | 0.06 |
| DSP Overnight Fund | 1,248.23 | 6.39 | 0.08 |
| Kotak Overnight Fund | 3,498.64 | 6.39 | 0.08 |
| Baroda BNP Paribas Overnight Fund | 519.51 | 6.39 | 0.09 |
| Aditya Birla SL Overnight Fund | 7,697.73 | 6.38 | 0.05 |
Disclaimer: Please note that the above table is for educational purposes only, and is not recommendatory in nature. Please do your own research or consult your financial advisor before investing.
Note: The data on this list of overnight mutual funds is from 7th May 2025 and derived using Tickertape Mutual Fund Screener
What is an Overnight Mutual Fund?
Overnight mutual funds are ultra-short term funds that accumulate returns from debt-based investment assets or money market instruments with a maturity of a single day. Investors can redeem the capital invested in an overnight fund after 24 hours of investment. This makes them more liquid than any other debt fund.
Features of Overnight Mutual Fund
- Security and Stability: Overnight investment funds are among the low-risk investment options available, primarily investing in short-term securities with minimal credit and interest rate risk.
- Modest Returns: While low risk often translates to greater security, it also means lower returns. Investors should not expect significant capital gains when investing in overnight funds.
- Diverse Allocation: Different overnight debt mutual funds may allocate capital to a variety of short-term financial instruments, such as government bonds or highly rated commercial papers. It’s crucial to understand the specific instruments each fund invests in.
- Thorough Research Required: Despite their security, not all overnight mutual fund options are created equal. Careful analysis and research are necessary before investing, especially to assess fund performance, fees, and asset allocation.
- High Liquidity: Overnight funds offer liquidity comparable to a savings account, providing easy access to funds without penalty.
- Best for Short-Term Horizons: Best-performing overnight mutual funds are ideal for investors with an investment horizon of less than a month. If you’re looking to park your funds temporarily, they provide a secure and liquid option.
How Do Overnight Mutual Funds Work?
To understand the working of best overnight funds for investment, you need to understand what investment products they allocate capital to. These products are as follows:
Investment Products Allocated By Overnight Mutual Funds
The funds pick Collateralised Borrowing And Lending Obligation (CBLO), overnight reverse repo rates, Certificate of Deposits, Commercial Papers, and other money market instruments that offer fixed returns. The portfolio holdings of even high-return overnight funds shuffle every night.
Overnight Fund Earnings
Debt holdings pay interest on the capital. They do not trade based on price. Therefore, earnings for overnight funds are via interest rates. Moreover, when the liquidity in the market is high, the interest rates decline, and investors earn less. On the contrary, when the liquidity in the market is tight, then the interest rates are generally hiked by the government, and the funds start giving out better returns to the investors. Overnight funds are closely related to the interest rates of bonds and other capital market instruments. Thus, market timings matter while investing in overnight mutual funds.
Who Should Invest In An Overnight Mutual Fund?
Investors with less risk appetite usually invest in overnight mutual funds for liquidity, as it is considered safer compared to any other financial instrument. Overnight funds are considered ideal for people starting their investment journey.
This, however, does not mean that experienced investors do not park their funds in overnight mutual funds. For instance, if High Net Worth Investors (HNI) are about to receive extra funds, they prefer to park their capital in overnight mutual funds until they get a better investment opportunity.
Factors to Consider Before Investing in Overnight Mutual Funds
Before investing in low-risk overnight funds, you need to know these essential things :
- Overnight mutual fund’s portfolio shuffles every fortnight/ or on the day after the trading session.
- The overnight fund returns depend upon the liquidity and interest rates (borrowing rate) in the market.
- As per the mandate, an overnight fund has to allocate funds into the lowest-risk debt instruments. Therefore, the investor’s capital is safe and does not have any default and interest risk.
- The expense ratio of an overnight mutual fund is generally less than 1% as they are managed passively.
Taxability Of Overnight Mutual Funds
The taxation policy of overnight mutual funds is similar to that of a debt fund. By investing in overnight mutual funds for capital preservation, investors earn capital gains and dividend income. If investors buy at a lower price and sell at a higher price, they are taxed on the profit/gains, commonly called capital gains tax.
Capital gain tax depends on the holding tenure of the investor. They are classified as:
| Capital Gains Tax | Description |
| Short-Term Capital Gains (STCG) | If you sell your debt fund units within three years (36 months), the tax will be as per your income tax slab. |
| Long-Term Capital Gains (LTCG) | For debt funds held for over three years (36 months), the tax rate is now a flat 12.5% without indexation benefits. |
The removal of indexation benefits for debt funds means the entire gain from selling a debt fund after three years (36 months) will be taxable at a flat rate of 12.5%.
Advantages Of Overnight Mutual Funds
These are some of the significant advantages of overnight mutual funds:
- Low risk: Short-duration overnight funds are the least risky out of all the available mutual funds because, as per the mandate, fund houses have to invest in low-risk debt instruments. Also, the possibility of the default in interest payment is next to impossible. Moreover, the volatility is also low. Therefore, overnight price or interest rate does not fluctuate.
- Saves from market volatility: All the other markets are highly volatile, especially the equity markets. Therefore, the risk exposure is high in volatile markets. Also, the most significant advantage is the investment horizon. It saves investors from losing capital. The overnight fund performance remains unaffected even if the central bank makes any changes to the interest rates.
- Easy entry and exit: There is no entry and exit load on overnight mutual funds. Thus, investors can redeem the entire amount within a day without even paying any redemption fee to the fund house.
- Low cost: The expense ratio of an overnight mutual fund is lower as it is passively managed. Therefore, the investment cost is low.
Bottom Line
The mutual fund industry has truly revolutionised investments in India, launching customised products to cater to every type of investor and investing style, especially for retail investors. Amongst the many options, the overnight fund is an interesting scheme. As risk-averse as it can get, it aims to allocate investor funds in debt instruments and others for a period of 24 hours, promising the safety of capital and interest. However, it is important to research the fund thoroughly and understand your risk appetite before investing.
Frequently Asked Questions (FAQs) About Overnight Funds
Are overnight funds better than FD?
Overnight funds offer higher liquidity and potentially better returns compared to fixed deposits (FDs), as they invest in short-term debt instruments. However, FDs offer fixed returns and are typically safer, while overnight funds carry some degree of market risk.
What are the risks associated with overnight funds?
Overnight funds have minimal risk since they invest in short-term, high-quality debt securities. However, they are still subject to interest rate fluctuations and credit risk, though the risk is typically lower compared to other mutual funds.
Where do overnight mutual funds invest?
Overnight mutual funds primarily invest in short-term money market instruments, such as Treasury bills, certificates of deposit, and commercial papers, with maturities of one day or up to one week.
Which overnight fund is best in India?
Here’s are some of the best overnight funds in India based on 3Y CAGR:
– Bank of India Overnight Fund
– Axis Overnight Fund
– Nippon India Overnight Fund
How to identify the best overnight funds?
To identify the best overnight funds, consider factors such as the fund’s expense ratio, past performance, assets under management (AUM), and the credit quality of the instruments in which the fund invests. Additionally, compare returns to benchmarks like the overnight call rate.
