As the famous saying goes, “Save money and it will save you”. Your savings help you meet your Goals as well as be emergency ready, provided they are adequate and easily available. Thus, you need a smart saving plan that allows your money to grow and offers enough liquidity at the same time. If you are an investor looking for making the most of your idle money at home or in a bank, then you may want to invest in Overnight Funds.
What are Overnight Funds?
Overnight Funds are open-ended Debt funds that invest in securities having a maturity of one business day. Such funds are highly liquid. (Investments can be converted to cash easily and quickly. Generally, redemption requests are processed within one business day). Also, they are relatively safer compared to other Debt Funds.
How do Overnight Funds work?
Overnight Funds invest in overnight securities or securities that mature in one business day. These include TREPs (Triparty Repo Dealing and Settlement)*, market repos, and securities having 1-day maturity.
What are the benefits of Overnight Funds?
Overnight Funds are desirable today because of the following advantages:
How are Overnight Funds taxed?
The tax treatment of Overnight Funds is the same as Debt Funds. If you stay invested for less than 3 years, your gains will be classified as short-term capital gains and will be taxed as per your tax slab rate (similar to traditional savings instrument). If you hold your Overnight Fund for 3 years or more, your gains will be subject to a 20% long term capital gains tax. However, in this case, you will get the benefit of indexation (available to Debt funds), which means your purchase cost will be adjusted for inflation. [Tax benefits are subject to prevailing tax laws.]
Who are Overnight Funds suitable for?
An Overnight Fund may be a good investment option in the current scenario for the following:
To sum it up, Overnight Funds can be looked at as an emergency fund that earns reasonable returns and is easily accessible.
*The Reserve Bank of India defines Triparty Repo as follows: Tri-party repo is a type of repo contract where a third entity (apart from the borrower and lender), called a Tri-Party Agent, acts as an intermediary between the two parties to the repo to facilitate services like collateral selection, payment and settlement, custody and management during the life of the transaction.
** With effect from 19th April, 2020, the SBI interest rate on savings bank deposit account is 2.75% p.a.
***(Source-ICRAMFI Explorer, April 30, 2020)