Overnight Funds

Overnight funds are open ended debt schemes which invest in overnight securities with a maturity of one day. Overnight Fund Schemes seek to generate reasonable income, with very 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.

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 in 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 & Characteristics
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 concerCompletely Risk averse investors.
  • Institutional Investors who need to maintain Liquidity
  • CRISIL CBLO Index is the benchmark index for these funds. The scheme carries Zero entry and exit load.
Performance of Overnight fund Schemes (17-01-2019):

Overnight funds were initially operated by few fund houses. In the aftermath of  IL&FS crisis, Investors developed cold feet even towards some Debt funds and in addition to existing 4-5 Overnight Funds many other fund houses have launched overnight Funds. We are depicting performance of following Overnight  funds  who have been there for quite some some time. All Schemes are Direct-growth option.

1) HDFC Overnight Fund (HDFC OF) 2) SBI Overnight Fund (SBI OF) 3) UTI Overnight Fund (UTI OF) 4) L&T Cash Fund (now Overnight Fund ; L&T OF)
on 17-0-19 HDFC OF SBI OF UTI OF L&T OF
AUM in cr 8861 3293 1079 615
Expense% 0.15% 0.11% 0.16% 0.09%
Returns 1w 0.12% 0.15% 0.12% 0.12%
Returns 1m 0.55% 0.50% 0.53% 0.56%
Returns 3m 1.59% 1.55% 1.60% 1.59%
Returns 6m 3.17% 3.03% 3.23% 3.17%
Conclusion:
  • The recent IL&FS crisis & consequent  after effects on Debt market has renewed new interest in Overnight funds  which led to a spree in Fund Houses launching  Overnight Funds. This includes AMCs like Reliance Mutual Fund, DSP Mutual Fund, ICICI Prudential Mutual Fund and Aditya Birla Sun Life Mutual Fund etc.
  • Due to this nervousness in Debt market,  Assets with overnight funds have soared considerably.
  • 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, Overnight funds make sense.
  • Overnight 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 and safety.
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 NISMSeries 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.
Performance of Overnight fund Schemes (17-01-2019):