Managing cash flows efficiently is critical for individuals and businesses. Parking surplus funds in savings accounts provides liquidity but at the cost of foregone returns. This is where overnight funds can prove beneficial – they provide safety and liquidity of savings accounts while also delivering comparatively higher yields. Overnight funds allow parking spare cash for the short term to optimize returns without compromising on having access to liquid funds for regular needs.
What are overnight Funds?
Overnight funds are open-ended debt mutual fund schemes that invest in securities with a maturity of 1 day. The funds allow you to park surplus cash for a very short term to earn returns without locking in the capital for long. They provide high liquidity along with comparatively higher returns than savings accounts, while ensuring safety of capital.
Benefits of overnight mutual funds
Daily liquidity
You can withdraw money on any business day without exit load. This makes it easy to liquidate a portion of your portfolio during volatility.
Low credit risk
Funds invest in securities maturing in 1 day issued by high quality borrowers. This ensures capital protection.
Higher returns than savings accounts
Overnight funds generally provide 50-150 basis points higher returns than savings accounts for similar liquidity and safety.
Low interest rate risk
Securities mature daily, eliminating interest rate risk faced by longer-term debt mutual funds.
Convenient online access
You can invest or redeem overnight funds easily through online portals offered by AMCs.
Overnight funds can be utilized in the following ways to protect your portfolio during times of market uncertainty.
Build an emergency fund
Maintain 6-12 months expenses in overnight funds to prevent redeeming assets when markets fall. This provides a cushion without needing to sell other investments at losses.
Asset allocation buffer
Keep 5-10% of overall portfolio in overnight mutual funds. If equity markets turn volatile, this buffer can be used to rebalance and invest more in equities without redeeming other assets.
Parking cash from SIPs
Instead of letting SIP amounts accumulate in your bank account, park it in an overnight fund. This preserves ammunition to deploy into market dips without sitting idle.
Route for STPs
Do periodic STPs from liquid or ultra-short-term funds to overnight funds instead of direct equity funds. This creates a holding pool to use at opportune moments.
Withdrawing judiciously from overnight funds
- Limit withdrawals only for deploying into market declines. Avoid frequent redemptions.
- Analyze overnight fund returns across AMCs and select ones providing comparatively higher yields.
- Use growth option instead of dividends to benefit from compounding if liquidity needs are not very urgent.
- Stagger money across 2-3 overnight funds to diversify risk instead of parking all money in one scheme.
- Have backups like an emergency corpus in savings accounts so overnight mutual funds are not depleted for non-investing needs.
Overnight funds can help cushion your portfolio during market swings thanks to their unique benefits. Using them prudently as part of an overall asset allocation strategy can aid in protecting your investments.