I would freely admit that the world of finance is not something that I understand much of. However, I do understand the importance of saving. Over the years, I have also understood that one must have diversified investments. One has to think beyond just fixed deposits which are safe but which hardly manage to keep pace with the rate of inflation. If one looks to actually grow wealth one has to think about equity, mutual funds and other investment avenues. Overnight funds are another option and this is what I understand by these:
If you haven’t heard of overnight funds, you're not alone. These are among the newer category of mutual funds and I came across the term overnight funds only recently. These are funds with, as the name suggests, a maturity period of one day. SEBI defines these funds as “open-ended debt mutual fund schemes that invest in overnight securities with a maturity of one day.”
These funds invest in debt instruments (corporate or government bonds, leases, debentures, bills of exchange, promissory notes) for just one day. A fund manager will buy and sell securities on a daily basis. The maturity period of one day means that the investor enjoys liquidity and the ability to access funds when required. These are often used by companies, banks, insurance agencies etc. to park surplus funds for the short term for moderate returns.
The maturity period of one day results in earnings from the overnight price difference. According to some experts, overnight funds are a good idea because they offer greater liquidity and carry low risk. These funds offer moderate returns. They will earn more than your regular savings bank account. So for a lot of people, it makes sense use one's savings bank balance that may otherwise be lying idle and invest that in overnight funds.
Overnight funds are considered to be low risk investments; suitable for people who are generally risk averse. They are thought to be among the safest debt funds. They are not impacted by market volatility or RBI changes in interest rates. Also, the risk of default on repayment is negligible. The flexible holding period and low cost (expense ratios are generally below 1%) also makes these attractive for some of us.
What I understand about overnight funds is this: these are a good option for funds that people may currently have and which they are looking to invest elsewhere in the near future. Investment in overnight funds is reasonably safe and liquid. Minimum investment requirements may vary as per the fund manager, however usually, amounts as low as Rs. 1000 can be invested in overnight funds.
The main drawback of overnight funds appears to be fairly low returns. So while they could make sense for those looking to park funds for a short duration, those looking for higher yields would do better to look elsewhere. Some of the top performing overnight funds are SBI Overnight Fund, HDFC Overnight Fund, UTI Overnight Fund, L&T Cash Fund and Aditya Birla Sun Life Overnight Fund. So overnight funds may not be for all of us, but for some people they could make a lot of sense for modest returns in the short term.
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