Overnight funds are a type of mutual fund that invests in short-term debt instruments maturing within a day. These funds are ideal for investors looking to park surplus cash in a safe, low-risk investment that offers liquidity. Here’s an overview of their goals and advantages:

Goals of Overnight Funds

1. Investment in Short-term Instruments
   • Primary Holdings: Overnight funds invest in high-quality, short-term instruments like Treasury bills, commercial papers, and other overnight securities.
   • Smooth Trading: The short duration of these securities allows for easy trading for investors.
2. Minimizing Risk
   • Risk Reduction: By investing in short-duration securities, these funds aim to minimize exposure to interest rate changes and credit risks.
   • Safety: Focus on reputable entities and one-day maturities enhances the safety of these investments.
3. High Liquidity
   • Easy Transactions: With one-day maturities, investors can easily buy or sell units during the trading day, ensuring high liquidity.

How Overnight Funds Operate

Step 1: Investment

Overnight funds primarily invest in:

• Collateralized Borrowing and Lending Obligations (CBLOs): Money-market instruments involving collateral-based borrowing and lending.
• Overnight Reverse Repos: Agreements involving the sale and repurchase of securities the next day.
• Short-term Debt Instruments: Securities that mature within one day.

Step 2: Income Generation

• Interest Earnings: The main income source for overnight funds is the interest earned on these short-term debt securities.

Advantages of Investing in Overnight Funds

1. Protection from Market Volatility
   • Low-risk Profile: The daily portfolio adjustment protects investments from long-term risks like interest rate fluctuations and credit risks.
2. Easy Withdrawals
   • High Liquidity: Investors can buy or sell units anytime during the trading day, providing easy access to their funds.
3. Short-term Investment
   • Cash Management: Ideal for short-term needs such as upcoming expenses or managing temporary cash surpluses.
4. Low-risk Investment
   • Secure Option: Investing in overnight securities ensures minimal exposure to market and credit risks, making these funds a secure choice.

Who Should Invest in Overnight Funds?

• Short-term Investors: Those looking to invest surplus cash for a short period can benefit from the liquidity and safety of overnight funds.
• Efficient Cash Management: Suitable for individuals or entities needing to manage idle cash effectively.

Tax Implications of Overnight Funds

Capital Gains Tax

• Short-term Capital Gains (STCG): Gains from investments held for less than 36 months are taxed according to the investor’s income tax bracket.
• Long-term Capital Gains (LTCG): Gains from investments held for more than 36 months are taxed at 20% with indexation benefits.

Dividend Tax

• Tax on Dividends: Dividends from overnight funds are taxed according to the investor’s income tax rate.

Summary

Overnight funds provide a secure, liquid, and low-risk investment option for managing surplus cash over short periods. They are especially beneficial for investors who want to avoid market volatility while keeping their funds easily accessible. Understanding their goals, operation, benefits, and tax implications can help investors make informed decisions for their short-term financial strategies.