Overnight Fund
A SEBI-categorised debt fund that invests exclusively in overnight securities — instruments with a residual maturity of exactly one business day — offering the lowest duration and credit risk in the mutual fund universe.
An overnight fund is a SEBI-categorised open-ended debt scheme that invests exclusively in overnight securities — defined as debt instruments with a residual maturity of one business day (SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, October 2017). The overnight category was introduced to address investor demand for a near-zero-risk, ultra-liquid vehicle — distinct from liquid funds (≤91 days) — by confining the portfolio entirely to the overnight money market. Every instrument in the portfolio matures within the next business day, and the proceeds are reinvested at the prevailing overnight rate.
What sits in the portfolio
The overnight constraint limits the portfolio to a narrow set of instruments:
- Overnight reverse repo: The primary instrument; the fund lends to RBI (reverse repo) or commercial banks (market repo) overnight. The overnight repo rate is the floor rate in RBI's Liquidity Adjustment Facility (LAF) corridor.
- TREPS (Triparty Repo on Government Securities): Collateralised overnight borrowing-lending on the Clearing Corporation of India (CCIL) platform; used extensively by AMCs for cash management. Counterparty risk is near-zero due to CCIL's central counterparty guarantee.
- Overnight Dated G-Secs: Central government securities with residual maturity of one day; rarely encountered but permissible.
Portfolio duration is effectively zero — re-pricing happens daily. The NAV of overnight funds moves in a predictable, near-linear upward trajectory, reflecting the accumulation of the overnight rate (currently the RBI repo rate ± corridor). There is no mark-to-market volatility from duration.
Risk profile
Overnight funds represent the lowest-risk sub-category in the SEBI debt fund classification:
- Duration risk: essentially nil. No instrument matures beyond one business day; there is no price sensitivity to yield movements.
- Credit risk: near-nil for TREPS and RBI repo. The counterparty for TREPS is CCIL (central counterparty clearing), and for RBI repo it is the sovereign. Any direct interbank lending carries marginal counterparty risk, mitigated by collateral.
- Reinvestment risk: present. The fund reinvests daily at prevailing overnight rates. During a rate-cutting cycle, the fund's yield declines with each successive overnight rate fix. Unlike liquid or short-duration funds, there is no locked-in yield.
- NAV volatility: extremely low. On most days, NAV increases by approximately 1/365th of the annualised yield. Negative NAV days are extremely rare but theoretically possible in extreme market stress (e.g., a systemic CCIL settlement failure).
Taxation (post-Finance Act 2023)
Finance Act 2023 Section 50AA applies to overnight funds equally: all gains, regardless of holding period, are taxed as STCG at the investor's income slab rate. Because overnight funds are commonly used for very short-term deployment (days to weeks), the incremental tax impact versus a savings account is typically minimal. However, for investors using overnight funds as a cash management tool over multiple months, the slab-rate taxation (vs. no tax on savings deposits up to ₹10,000 deductible under Section 80TTA) should be factored into the effective yield comparison.
Worked example
Nippon India Overnight Fund (AMFI scheme code: 135781 — illustrative; verify from amfiindia.com) is one of the larger overnight funds by AUM. As at 31 March 2025, its portfolio was approximately 100% in TREPS and reverse repo, with a portfolio YTM of approximately 6.50% (in line with the then-prevailing RBI repo rate of 6.50%). An investor deploying ₹1 crore for 10 business days earns approximately ₹17,808 in gross returns (₹1 crore × 6.50% ÷ 365 × 10). After a 30% slab tax, the net return is approximately ₹12,466. The settlement cycle is T+1 for all redemptions, irrespective of amount, making this category suitable for daily cash management by treasuries and HNI investors.
See also
Primary source
SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114 (6 October 2017): sebi.gov.in. Finance Act 2023, Section 50AA. RBI LAF corridor and repo rate: rbi.org.in. AMFI scheme data: amfiindia.com.
Past performance is not indicative of future returns. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. ARN-314872. APMI APRN-01658. Content is informational and not investment advice.