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Outbreak of coronavirus had a massive impact on the markets. Equity markets around the world took a huge hit due to the pandemic and its after effects. This has raised concerns among investors about their financial security and future investments.
Following this concern, various alternate investment methods are back in the spotlight. Money 9 takes a look at ‘overnight funds’, its benefits, risks and its comparison with liquid funds.
What are overnight funds?
Overnight funds are debt funds that invest in money market securities with a maturity of one day.
“Some of these securities include reverse repo, collateralised borrowing and lending obligation (CBLOs) and other debt instruments. So investment in overnight funds essentially means the money matures in 24 hours,” said Mrin Agarwal, founder of FinsSafe and a financial coach.
How are overnight funds different from liquid funds?
Liquid funds typically invest in debt instruments for a slightly longer period of 91 days, for e.g. treasury bills, commercial bills and other corporate debts.
Hence, the difference in the maturity period of overnight funds (one day) and other liquid funds (91 days) is the single biggest contrast amongst the two.
Overnight funds vs liquid funds
“Since the maturity period of overnight funds is just one day, the risk of default isn’t really there. With liquid funds, there are risks involved due to fluctuation in interest rates which practically don’t exist with overnight funds. In the debt fund category, it is the lowest risk fund that is available,” Agarwal says.
What is the taxation policy for overnight funds?
Returns from all debt funds, whether is overnight or liquid, have the same tax treatment.
If you exit an investment before three years, then the gains are considered short term capital gains. They are taxed as per your slab.
Who is an ideal investor for overnight funds?
If your investment horizon is under a month, overnight funds can be considered. Otherwise, one should opt for other investment options. “If you want to park your money for very short duration of 10-12 days, then overnight funds are an ideal fit for you but invest in long term funds if you have the option,” Agarwal asserted.