Overnight funds are a form of debt funds. Overnight funds invest in debt securities that have maturities of one day. Providing the of utilizing the money in a better way is the main goal of overnight funds.

Characteristics of overnight funds

Investors who want invest for a very short investment horizon should go for overnight mutual funds as these funds mature in just a day. This allows investors make the best use of their surplus funds.

As overnight funds have a short investment horizon, these funds are relatively less risky. It limits the extent of the risk to the investment period. They do not carry any interest rate risk and has minimal credit risk.

Unlike other mutual funds, Overnight funds are popularly known for high liquidity. Due to this, investors can redeem their money instantly and in no time. Overnight funds are a good choice for businesses to invest their surplus funds.

Investors do not have to pay hefty penalties for having short investment horizon. They have the flexibility to withdraw money when required.

Taxation on overnight funds

Overnight funds are taxed like debt funds. For investors who hold units of overnight funds for less than 3 years are subject to short term capital gains. Taxation happens according to the income slab of the investor. While, if the units of the overnight funds are held for more than 3 years then  the investor are subject to pay Long Term Capital Gains (LTCG) tax at the rate of 20%. Also, the investors are eligible for indexation benefit here. Dividends earned from the investments in overnight funds are taxable as per the tax slab of the investors.

Things to look at before selecting an overnight fund 

While evaluating overnight funds, one should look at two factors: 1. Returns 2. Expense ratio

As overnight funds are a short-term investment vehicle i.e., they mature overnight, their performance should be measured on the basis of one week or at the most one month returns.

Expense ratio on the other hand is the amount charged by the Asset Management Company (AMC) to manage the investment portfolio of the investor. What investor actually earns is known after subtracting expense ratio from the returns earned. So, higher the expense ratio, lower the returns.