Overnight Funds

Overnight funds are open ended debt schemes which invest in overnight securities with a maturity of one day. The scheme seeks to generate reasonable income, with low risk and high level of liquidity from a portfolio of overnight securities having a maturity of one day. Overnight Funds is one of 16 debt mutual  categories notified by SEBI in its October, 2017 classification of  the  Debt Mutual Funds and accordingly aligned by the Mutual Fund AMCs.

The Overnight funds invest predominantly in the CBLO (Collateralized borrowing and lending obligation) instruments.  Collateralized Borrowing and Lending Obligation (CBLO) market is a money market segment operated by the Clearing Corporation of India Ltd. In the CBLO market, financial entities can avail short term loans from 1 day to 1 year  by providing  government securities as collateral and the lenders will get these securities as collateral  while giving loans . While n terms of functioning and objectives, the CBLO market is akin to call money market, what differentiates it is  that lenders and borrowers use collateral for their activities.
Collateralised Borrowing and Lending Obligation (CBLO) money market was created. as non banks are not allowed to participate in call money market  with  effect from August 2005, and CBLO money market facilitates non banks participation in money market  in a Collateralised secure environment. In  CBLO money market,  borrowing and lending is in fully secured environment with Government securities used as collateral. This gives an edge to Overnight funds over all other short term  Debt funds including Liquid Funds.

Overnight Funds: Who should Invest
  • For Investors whose primary goal is to to ensure that chances of of capital erosion should be very low and investors want to minimize risk due to default or interest rate changes
  • Suitable for Investors looking to park their surplus fund lying idle for short duration from one day to typically less than a month
  • Investors looking for high level of liquidity
  • In Turbulent times in Debt market when safety and liquidity becomes the prime concern
  • Risk averse investors
  • Institutional Investors who need to maintain Liquidity

Overnight funds are operated by few fund houses as on date. CRISIL CBLO Index is the benchmark index for these funds. The scheme carries Zero entry and exit load. 

Performance of Overnight fund Schemes:  
Particulars/Scheme
UTI Overnight Fund
HDFC Overnight Fund
SBI Overnight Fund
L&T Cash Fund*
PlanDirectDirectDirect
OptionGrowthGrowthGrowth
AUM in crore28.59146.07142.17423
Expense Ratio0.07%0.15%0.11%0.10%
Volatility (Std Deviation)1.180.130.130.24
Returns 1w0.12%0.10%0.15%0.11%
Returns 1m0.53%0.50%0.50%0.52%
Returns 3m1.59%1.58%1.55%1.57%
Return 6m2.75%3.12%3.03%3.11%
* Overnight Fund from Apr 2018
Conclusion
Overnight funds  invest in overnight securities with a maturity of one day  and that too in Collateralised Borrowing and Lending Obligation (CBLO) money market which is secure due to use of collateral. Liquid funds on the other hand invest in debt and money market securities with a maximum maturity of up to 91 days.  The risk in an overnight mutual fund is lower than a liquid fund. While overnight Funds  Hence the returns are also bit lower.  Thus Overnight fund is a type of debt fund with practically no interest rate fluctuation risk and credit rating risk and low credit default risk and suitable for risk averse investors. 
While Govt Banks give low interest on Saving Bank Accounts, some pvt sector banks give higher interest which is in range of  historical returns from Overnight funds . Further there is Rs. 10000, 80 TTA tax benefit in Saving Bank. However for investors who have exhausted this limit or have a large corpus but are highly risk averse, these funds make sense. The funds can also be considered to ride over temporary disruptions in debt market or park surplus funds for short time. However the category seems to be more suitable for institutional investors who may be in need of Liquidity.

Standard disclaimer:  I am not a SEBI registered analyst and above analysis is for educational purpose only. I have however been investing in mutual funds for more than two decades  now and have also passed NISM
 Series V-A: Mutual Fund Distributors Certification Examination purely for better understanding of the subject. Please do your own due diligence as stock market and Mutual Fund  investments have good degree of inherent risk.