OVERNIGHT SCHEMES: UNLOCKING THE POTENTIAL OF ONE-DAY FUNDS

As interest rates continue to decline, investors are looking for alternative investment options to keep pace with the changing market landscape.
The overnight schemes offer a unique investment opportunity, allowing investors to earn interest on their money while minimizing risk.

Overnight schemes have a portfolio that invests in securities that mature in a single day. The portfolio is built using overnight reverse repos, CBLOs (collateralised borrowing and lending options), and money market securities that mature in a day. These schemes are ideal for investors who want to keep their money liquid while generating returns.
The overnight funds are usually offered by asset management companies, and there are 34 such schemes that manage assets worth `1.06 lakh crore across 645,000 folios. According to data from the Association of Mutual Funds of India (AMFI), these schemes have an average annual return of 6.5% over the last year.

THE ADVANTAGES OF OVERNIGHT FUNDS

Low risk and volatility
High credit rating
Ability to earn interest on money while minimizing risk

Wealth managers believe that investors can use overnight funds to invest in the market instead of keeping large sums in savings bank accounts. They argue that this is a better way to earn returns, as overnight funds can offer returns of 2.75-3% or more, which is higher than what is typically earned from savings bank accounts.

THE TIME FRAME AND MINIMUM AMOUNT NEEDED

Time frame: 1 day to a week
Minimum amount: Rs 500 or Rs 1,000 as a lumpsum investment

Financial planners suggest that investors should use overnight funds to invest money if they have a time frame of 1 day to a week. Most funds accept Rs 500 or Rs 1,000 as a lumpsum investment in these schemes.

IS THERE A RISK WHILE INVESTING IN OVERNIGHT FUNDS?

Low risk and volatility
Financial planners consider overnight funds to have low risk and volatility as they invest in instruments with high credit rating (P1+) and which mature in a day.

TAX TREATMENT OF OVERNIGHT FUNDS

Definition:

Overnight funds are taxed like debt funds with gains taxed in line with income slabs.

According to the Indian tax laws, overnight funds are taxed as debt funds, with gains taxed in line with the income slabs. This means that the interest earned on overnight funds is taxed as ordinary income, and the capital gains are taxed as short-term gains.

WHY INVESTORS SHOULD CONSIDER OVERNIGHT FUNDS

Low risk and volatility
Ability to earn interest on money while minimizing risk
Earning returns of 2.75-3% or more

Wealth managers believe that investors should consider overnight funds as a good option for investing money. They argue that these funds offer a low-risk and volatile investment option that can earn returns of 2.75-3% or more, which is higher than what is typically earned from savings bank accounts.

Overall, overnight funds offer a unique investment opportunity that allows investors to earn interest on their money while minimizing risk.