Overnight Funds – A good choice for safety

Debt mutual funds are promoted as products that give ‘better returns’ than fixed deposits, while being quite safe. This is of course not true. Debt funds carry more risks than bank deposits.  Another popular misconception is around one category of debt funds – Liquid funds. They are almost universally (mis)regarded as a direct alternative to bank deposits.  This is unfortunately not the case. Liquid funds invest in debt instruments with maturity upto 90 days. Sharp downturn in a business can affect the quality of its short term debt and hence affect the returns of liquid funds that hold this debt.  In the recent months, many liquid funds in India have been affected by sharp downgrade in credit ratings of some companies.

Overnight funds is a less popular category of debt funds. These invest in debt instruments that have maturity of 1 day, yes 1 day.  At this resolution, little effect would be seen because of interest rate changes, credit downgrades, etc.  The only significant risk in this fund is if the issuer of the debt vanishes overnight.

This article in freefincal.com has a detailed explanation of Overnight funds: Worried about risk? Use Overnight mutual funds

There was one issue with this category. As of mid-2018, there were only four funds – from HDFC, L&T, SBI and UTI. In the recent months this is changing, and changing fast.  Just in the two months of Oct and Nov, 8 drafts for NFOs have been filed with SEBI for this category.  Funds from two big players – ABSL and ICICI – are expected to launch very soon.  The other AMCs may also follow suit.  This would more than double the choice of AMCs in this category.