The safest mutual funds are those that trade overnight. Overnight funds are ideal if you are new to mutual funds and want to test them out before investing heavily.

An open-ended debt strategy called Overnight Funds makes investments in debt instruments that mature the next day. This means that as the portfolio’s assets mature each day, the fund management utilizes the proceeds to buy new securities that will mature the next day. These funds are not subject to the same kind of interest rate risk or default risk as the rest of the debt funds because the securities in these funds mature the following day. They also appear to deliver the lowest return due to their low-risk profile.

For businesspeople or entrepreneurs who frequently need to hold onto big sums of money for extremely little periods until they can use it elsewhere, overnight funds are a good option. Instead of keeping excess cash in a current bank account, it is preferable to invest it in an overnight fund and get returns, even if they only last a few days. If you wish to save some money for unexpected expenses, they are also great for creating emergency funds. Since these funds also offer maximum liquidity, your investment can grow while still being useful.

 1. Advantages of Overnight funds

Particularly for individual investors or those who have historically kept their money in bank accounts, debt funds have significant advantages.

Safest Debt Fund: The least risky debt fund is overnight, which has zero interest rate risk and little credit risk. Let’s take a closer look at this.

The only investments made by overnight funds are overnight securities, thus there is no potential of making gains or losses on capital. The fund’s value does not fluctuate but grows gradually as a result of interest income. Since securities with one-day maturities are extremely unlikely to experience interest payment default, overnight funds also carry a very low credit risk. In conclusion, overnight funds are somewhat safer than liquid funds, which are the closest category of debt funds in terms of risk-return.

Low cost: Due in large part to the lack of active management of their loan holdings, overnight funds are low-cost debt funds. In reality, the majority of overnight funds run with expense ratios under 1%.

Flexible holding period: An investor in an overnight fund may keep their investment in the fund for as long as they need to. While generating secure, market-linked returns for the duration of the investment, it is simple to enter and leave the investment.

2. Things to Consider Before Investing in Overnight Funds

The safest type of debt financing is available overnight. Before investing, investors must consider a few fund characteristics.

First, return optimization is not a goal of overnight funds. In contrast, they are similar to savings accounts in that the investment is secure and easily withdrawable. So, as a group, overnight funds typically have low returns.

The returns and expense ratios of the many funds available on the market do, however, vary quite a little. Investors should therefore carefully assess the market and choose funds with a track record of strong performance and cheap costs.

Second, in exchange for safety and liquidity, investors in overnight funds must give up some of their return expectations. Because of this, investing in an overnight fund should be compatible with the investor’s financial objectives and strategy rather than just a response to recent credit default incidents.

For instance, while it is a good idea to set aside some funds for overnight use, it might not be a good idea to switch totally to overnight funds just to reduce risk. If an investor has a low-risk tolerance but a longer investment horizon (say, three to six months), investing in liquid funds or ultra-short duration funds that hold high-quality bonds can yield higher returns.

3. How to Find the Best Overnight Fund

Returns and expenditure ratios are two factors that are frequently considered while assessing overnight funds. Since overnight funds invest in securities that mature overnight, it is appropriate to gauge their performance using returns from the previous week or, at most, the previous month.

The amount the fund charges annually for managing the investment portfolio is known as the expense ratio. After deducting the expense ratio, the net return on the investment is computed. Therefore, larger expense ratios lower the investor’s overall return.