Overnight Mutual Funds: The Short-term Investment Choice
In the dynamic world of investments, stability is a key to conserving capital. For those seeking a smart short-term investment choice, overnight mutual funds present a compelling option. Let's know more about overnight mutual funds.
What are Overnight Mutual Funds?
Overnight funds are debt funds that invest in overnight assets or securities with a residual maturity of one day. This is a new category of debt funds introduced as part of SEBI’s mutual fund reclassification exercise in 2018 and there has been a noticeable increase in investments in Overnight Mutual Funds. The steep inclination can be attributed to the fund’s extremely low risk positioning, investor-friendly features and their associated benefits.
At the beginning of each business day, the Asset Under Management (AUM) is in cash. all investments are made with an overnight maturity, and they mature on the following business day. This is then invested again with overnight maturity, and the cycle continues. Since the securities in these funds mature the next day, these funds are not exposed to the kind of interest rate risk and extremely low levels of default risk unlike other longer maturity debt funds. This low-risk profile also implies they typically offer the least return.
This type of open-ended debt scheme is considered the safest of all mutual funds schemes.
Purpose of an Overnight Fund:
The purpose of overnight funds is to offer investors the ability to generate some return on their cash reserve. These are typically used by corporate entities which do not get an interest of balances in their current accounts. The following features of the fund make its purpose more feasible:
High Liquidity: These funds are regarded as the most liquid investment securities, enabling investors to access their funds efficiently and at short notice.
Low-risk: The short investment horizon and instant maturity limit the fund’s exposure to risk, keeping it to a bare minimum.
Things to consider before investing in Overnight Funds:
Overnight funds are the safest category of debt funds available. However, investors must keep in mind some fund features before investing.
Firstly, overnight funds are not designed to optimize returns. Instead, they are akin to a savings account, where the investment is considered to be safe and can be readily withdrawn. Thus, overnight funds, as a category, tend to offer relatively low returns.
Secondly, investors in overnight funds have to compromise on returns in exchange for safety and liquidity. Therefore, investment in an overnight fund should be consistent with the investor’s financial goals and strategy, and not merely a reaction to volatility and risk in other markets. For example, while it is a good idea to allocate some money to an overnight fund, it may not be smart to shift entirely to overnight funds simply to avoid risk just because of volatility in the equity of debt market.
Advantages of Overnight Mutual Funds:
An overnight fund is a suitable option for those investors who have a short term surplus which they want to invest with a high level of stability. Since these funds are not affected by changes in interest rates and have an extremely low default risk, they are a safe debt mutual fund scheme to invest in.
Here is a list of other benefits of the Overnight Mutual Funds:
Better utilization of idle funds: The fund serves as a beneficial investment option for those investors who want to use their extra cash to earn a higher profit at minimum risk. Unlike most bank deposits and fixed deposits with extended tenures, these funds allow investors to generate returns over a shorter period.
Low-risk factor: As mentioned before, interest rate changes or the change in credit ratings of an issuer have little to no effect on such funds. Its short investment horizon protects investors of such funds against risks like interest rate fluctuations, uncertainty against liquidity, credit risk, and cushions it against market volatility. This particular feature makes it a suitable investment option for those who have a low-risk appetite. It also works in favor of investors who tend to possess a conservative outlook towards investments.
Liquidity: The funds do not have any entry or exit load and investments in these can be withdrawn at the shortest notice. This makes them an instrument of choice for those seeking liquidity.
Key Differences between Overnight funds and Liquid funds:
The primary difference is the maturity period of the underlying securities. Overnight funds invest in extremely short-term instruments with a one-day maturity, while liquid funds invest in slightly longer-term securities with maturities of up to 91 days.
Conclusion:
In a world where financial markets are ever-evolving, Overnight Mutual Funds emerge as a smart and strategic choice for investors seeking stability and growth in the short term. By understanding the dynamics, advantages, and considerations associated with these funds, investors can unlock a path to financial success while navigating the complexities of the investment landscape.
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