Overnight mutual fund

An overnight mutual fund in India is an open-ended debt scheme that invests exclusively in debt and money-market instruments with a maturity of exactly one business day (overnight), under SEBI’s October 2017 scheme categorisation circular. The fund’s entire portfolio is redeployed each business day into new overnight instruments, ensuring that at no point does the fund carry any instrument with a maturity beyond the next business day. This structure makes overnight funds the safest category within the Indian mutual fund universe: they carry effectively zero interest-rate duration risk and near-zero credit risk.

Regulatory definition

SEBI circular SEBI/HO/IMD/DF3/CIR/P/2017/114 defined overnight funds as:

• Scheme type: Open-ended debt scheme investing in overnight securities.
• Eligible instruments: Overnight instruments only: overnight repos, triparty repos (TREPS), and other overnight-maturity debt instruments.
• Prohibited instruments: Any instrument with a maturity beyond one business day.
• Exit load: No exit load permitted on overnight funds (per SEBI guidelines).
• Benchmark: Typically CRISIL Overnight Index, NIFTY 1D Rate Index, or Tri-Party Repo (TREPS) overnight rate.

Eligible instruments

Overnight funds invest in:

• Triparty Repo (TREPS): The primary instrument; a collateralised borrowing/lending mechanism cleared through the Clearing Corporation of India Limited (CCIL), where government securities serve as collateral. TREPS is backed by government securities, making it essentially risk-free. Introduced in 2018, TREPS replaced the earlier Collateralised Borrowing and Lending Obligation (CBLO).
• Overnight repos: Repurchase agreements with the Reserve Bank of India (repo under the Liquidity Adjustment Facility) or in the private repo market, collateralised by eligible government securities.
• Short-term Government securities maturing the next day: Rarely available.

TREPS typically constitutes 90% to 100% of overnight fund portfolios.

Return characteristics

Overnight fund returns track the prevailing overnight rate in the money market, which is closely linked to:

• The RBI’s repo rate (the rate at which RBI lends overnight to banks).
• The weighted average call money rate (WACR).
• The TREPS rate.

Historically, overnight fund annualised returns have ranged from approximately 3.5% to 7.5%, closely following the RBI policy rate. When the RBI cuts rates, overnight fund returns fall; when rates are raised, overnight fund returns rise.

Overnight funds do not benefit from the higher returns of longer-duration debt instruments; their returns are the pure overnight rate with no duration premium.

Risk profile

Overnight funds carry the lowest risk of any mutual fund category:

• Interest rate risk: Zero; instruments mature the next day, so there is no bond price sensitivity to interest rate changes.
• Credit risk: Near zero; TREPS positions are collateralised by government securities (G-Secs and T-Bills). There is no unsecured corporate credit exposure.
• Liquidity risk: Near zero; the entire portfolio matures each day.
• NAV volatility: Overnight fund NAVs move upward in near-perfect straight lines (daily interest accrual), with almost no day-to-day fluctuation.

SEBI’s risk-o-meter classifies overnight funds as “Low” risk.

Taxation

Overnight funds are debt-oriented and are taxed as per the Finance Act 2023 amendment:

For units purchased on or after 1 April 2023:

All gains (short-term or long-term) are taxed at the investor’s slab rate, regardless of holding period.

For units purchased before 1 April 2023:

• Less than 3 years: STCG at slab rate.
• 3 years or more: LTCG at 20% with indexation.

Given that overnight funds are typically used for very short-term parking (days to weeks), the long-term holding period was rarely relevant for most investors even before the 2023 change.

Securities Transaction Tax does not apply to debt fund transactions. See capital gains tax in India and ITR-2 for reporting.

Comparison with adjacent categories

Overnight versus liquid fund

A liquid fund holds instruments with up to 91-day maturity, including commercial paper (CP) and certificates of deposit (CD) from banks and corporates. This gives liquid funds marginally higher returns than overnight funds (capturing the duration and credit premiums on 7-91 day instruments), but also carries slightly higher credit risk (corporate CP) and marginal interest rate risk. Liquid funds impose a graded exit load for redemptions within 7 days; overnight funds have no exit load.

Overnight versus savings bank account

A savings bank account at a large bank offers 2.7% to 3.5% interest (as of 2025-26) with DICGC insurance up to ₹5 lakh per depositor per bank and instant debit card access. An overnight fund offers similar or slightly higher returns (4% to 7% depending on the rate cycle) with no DICGC insurance but near-immediate redemption. For amounts below ₹5 lakh, the safety and convenience of a savings account may be preferred. For amounts above ₹5 lakh or for entities without DICGC coverage (companies, trusts), overnight funds are preferred.

Overnight versus ultra-short-duration fund

An ultra-short-duration fund invests in instruments with Macaulay duration of 3 to 6 months, offering higher returns than overnight funds but with more credit risk and duration risk.

Use cases

Overnight funds are used by:

• Corporates and institutional investors parking large surplus cash for 1 to 7 days.
• Mutual fund distributors and AMCs as a vehicle for STP (systematic transfer plan) source funds.
• Individual investors temporarily parking proceeds from a property sale, inheritance, or large redemption before deciding on redeployment.
• Investors who wish to stay invested rather than keeping cash in a zero-return current account.

Exemplar schemes

Well-known overnight funds include:

• HDFC Overnight Fund (HDFC Mutual Fund)
• ICICI Prudential Overnight Fund (ICICI Prudential Mutual Fund)
• SBI Overnight Fund (SBI Mutual Fund)
• Kotak Overnight Fund (Kotak Mahindra Mutual Fund)
• Nippon India Overnight Fund (Nippon India Mutual Fund)
• Axis Overnight Fund (Axis Mutual Fund)
• UTI Overnight Fund (UTI Mutual Fund)

These are cited for reference only.

Suitability

Overnight funds are suitable for:

• Investors who need the absolute safest parking for cash for 1 to 30 days.
• Corporates and institutions that cannot take any credit risk.
• Investors who need a source fund for a systematic transfer plan into equity funds.
• Investors who are indifferent to the marginal return premium of liquid funds and prioritise safety above all else.

Overnight funds are less suitable for:

• Investors with horizons beyond a few weeks who want higher returns (liquid, ultra-short, or short-duration debt funds are more appropriate).
• Investors whose primary concern is tax efficiency (arbitrage funds offer better post-tax outcomes for 12+ month holding).

Regulatory oversight

Overnight funds are regulated by SEBI under the SEBI (Mutual Funds) Regulations, 1996. The mutual fund industry in India framework governs operations.

References

1. SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, “Categorisation and Rationalisation of Mutual Fund Schemes”, 6 October 2017.
2. CCIL, TREPS (Triparty Repo Dealing System) operational guidelines.
3. Finance Act 2023, Section 50AA.
4. SEBI (Mutual Funds) Regulations, 1996, as amended.