Need a place to park your money for a day or two—without letting it sit idle? Enter Overnight Funds.

Investors often face this dilemma:

If your goals are capital protection, easy liquidity, and marginally better returns than savings accounts, Overnight Funds might be exactly what you need.

They don’t aim for high returns, and they’re not for long-term investing—but in a diversified portfolio, they serve a very specific and important purpose.

1. What Are Overnight Funds?

Overnight Funds are a type of debt mutual fund that invest in instruments with maturities of just one day.

That’s right—only 1 day.

Each day, the fund invests in ultra-short instruments like:

• Tri-party repos (TREPS)

• Government securities (maturing overnight)

• Collateralized lending

By design, these funds reset daily, making them among the safest and most liquid mutual fund categories available.

2. Key Features of Overnight Funds

✅ Maturity of 1 Day

The instruments mature in 24 hours, minimizing interest rate or credit risk

✅ Low Volatility, No Duration Risk

NAV barely fluctuates because of near-zero exposure to price-sensitive instruments

✅ High Liquidity

T+1 settlement means you can typically redeem today and receive funds tomorrow

✅ No Exit Load

Unlike liquid funds (which may have exit loads for <7 days), most overnight funds don’t penalize early exit

✅ Low Credit Risk

Since instruments are extremely short-term and often backed by the government, the risk of default is almost zero

3. When Should You Use Overnight Funds?

✅ You’re waiting to invest in equity and want a short-term parking space

✅ You’re managing cash flows for business or household expenses

✅ You’ve received a bonus, sale proceeds, or windfall and are still deciding on allocation

✅ You want to stagger entry into mutual funds using STP (Systematic Transfer Plan)

✅ You’re looking to earn better returns than a savings account with similar liquidity

4. Returns: What to Expect

Since they invest in 1-day securities, returns are modest but stable.

📈 Typical Range: 3.5–5% p.a. (as of recent years)

Compare that to:

• Savings Account: 2.5–3.5%

• FD (7 days): 4–5% (but with penalties for early exit)

• Liquid Funds: 4.5–6% (higher risk than overnight)

Overnight funds won’t make you rich—but they’ll make you efficient.

5. Taxation of Overnight Funds (Post-2023)

As debt mutual funds:

• All capital gains are taxed as per your income slab, regardless of holding period

• No indexation benefit even if held for more than 3 years

That said, capital gains on short holding periods tend to be small, so tax impact is minimal in absolute terms.

6. Overnight Funds vs Liquid Funds

7. Ideal Use Cases in a Financial Plan

🟢 Emergency cash buffer

🟢 Temporary parking during asset rebalancing

🟢 Cash bucket for short-term STPs into equity

🟢 Sweep account alternative for surplus bank balances

🟢 Business or freelancer treasury during uncertain payout timing

TL;DR — Too Long; Didn’t Read

• Overnight Funds invest in 1-day securities—offering high liquidity, low risk, and stable returns

• Ideal for short-term parking of idle funds (1–30 days)

• Offer better-than-bank returns with minimal volatility and no exit loads

• Taxed as per income slab, but returns are low enough for tax impact to be limited

• A great tool for STPs, emergency buffers, and treasury management