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How investors are trying to meet short-term needs

By Sarbajeet K Sen
May 08, 2019 22:01 IST
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After the rationalisation and categorisation of mutual fund schemes undertaken by the Sebi in October 2017, overnight funds have emerged as a distinct category.

Illustration: Uttam Ghosh/

Do you have investible surplus and are looking to park it in an instrument that provides safety and liquidity, while earning reasonable returns over the short term?

In the past, the popular option among debt funds for this purpose was the liquid category.

But nowadays investors increasingly opt for overnight funds to meet their short-term needs.


Downgrades and defaults at IL&FS, several non-bank finance companies (NBFCs) and other reputed corporates have made investors hyper cautious.

During this ongoing crisis, investors took hits even in supposedly safe debt fund categories, such as liquid funds and banking and PSU funds.

While bank fixed deposits are relatively safe, their post-tax returns are unattractive.

They also require investors to define their investment horizon right at the time of investing.

Against this backdrop, overnight funds fit the bill nicely.

This is a new fund category.

Earlier, some fund houses had cash management funds that invested in very short-duration securities.

But their asset allocation was lax and many of them even held instruments of beyond 90 days maturity.

After the rationalisation and categorisation of mutual fund schemes undertaken by the Securities and Exchange Board of India (Sebi) in October 2017, overnight funds have emerged as a distinct category.

As the name suggests, they invest in overnight securities having a maturity of one day.

Many institutional borrowers like banks, insurers and corporates borrow large sums typically for a day or two.

Overnight funds participate in these opportunities.

Clearing Corporation of India (CCIL) backed collateralised borrowing and lending obligations (CBLOs) are their preferred choice.

“CCIL acts as the counterparty in CBLOs, hence they carry no counterparty risk. Given the overnight mandate of these funds, CBLO is a popular investment avenue for them,” says Kaustabh Belapurkar, director, fund research, Morningstar India.

Overnight funds have almost negligible risk associated with them.

“Interest rate and credit risk is almost negligible in these funds as they invest only in money market and fixed-income instruments that are to mature the next day.

"Theoretically, any fixed-income instrument will still carry some risk.

"But given the limited maturity profile of these funds, the risks are negligible,” says Belapurkar.

He adds that owing to the short maturity profile of their underlying instruments, their returns will typically be lower than that of liquid funds.

In a similar vein, Omkeshwar Singh, head, Rank MF, an arm of Samco Securities says: “These funds carry the lowest risk by holding securities of one-day maturity.”

Compared to overnight funds, liquid funds carry both greater risk and the potential to generate higher returns.

Investors looking to park their money temporarily, without risking their capital, may invest in these funds.

They can also serve as feeder funds for systematic transfer plans, for those investing in equity funds in a systematic manner.

Some of these funds had a different mandate earlier.

They have been renamed and reintroduced as overnight funds.

Hence, investors should not go by their current historical returns.

Select low-cost funds within this space and have moderate return expectations from them.

Interest rates are moving downward and the Reserve Bank of India may cut rates further.

As these cuts get transmitted to the money market, returns of these funds may decline further.

Gains on selling of units held for more than three years are subject to long term capital gains tax at the rate of 20 per cent after indexation. Gains on sale of units held for a shorter period are added to a person’s income and taxed at the marginal tax rate.

Their dividends are subject to 29.12 per cent dividend distribution tax.

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Sarbajeet K Sen
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