The Overnight Fund Advantage: Better Returns, Same-Day Access

A corporate investor with ₹100 crore parked in a current account earns ₹0, while the same amount invested in an overnight mutual fund earns ₹16.43 lakh. This difference adds up every time the investor leaves their company’s ₹100 crore idle in a bank account, in between transactions. Yet moving that money feels like more work.

This perception is a real problem. And there is a certain lack of awareness, with added misconceptions around overnight funds that are possibly hiding their actual benefits.

What are Overnight Funds?

An overnight fund is a type of debt mutual fund that invests in overnight securities with maturity happening in one business day. The fund earns interest for that day, and the combined corpus is reinvested in new overnight securities.

These funds are generally used as cash management tools by corporations and institutions, or by high-net-worth individuals (HNWI), to park large amounts for very short durations.

Think of this like buying a hotel room for a single day. The room price can fluctuate between a Monday and a Friday. But the price that a guest agrees to pay just before signing in will barely be different from what they need to pay at exit 24 hours later.

Misconception 1: "The Returns are the same as Bank Interest. Why bother?"

An investor has ₹100 crore lump sum sitting idle for the next 10 days, and they want to earn some interest during that time. They have 4 options: a bank savings account, a bank fixed deposit, a sweep deposit arrangement, or an overnight mutual fund.

Bank Current/Savings Accounts:

A Savings Account usually offers an interest rate of around 2.5% per annum (illustrative), and the interest generated can be significant based on the size of the principal.

2.5% interest on ₹50,000 for 10 days = ₹34.24
2.5% interest on ₹50 lakh for 10 days = ₹3424.65
2.5% interest on ₹100 crore for 10 days = ₹6,84,931.50 ~ ₹6.84 lakh

Since the interest earned becomes significant only for large sums of money, interest-generating options are usually sought after by companies, institutions, or high-net-worth individuals (HNWI) who have that kind of money.

But RBI actually bars corporations and institutions from using a Savings Account offering 2.5% interest for their business. Instead, businesses and institutions can only use zero-interest Current Accounts. So the interest earned on ₹100 crore for 10 days is ₹0.

HNW Individuals can use a Savings account. With ₹100 crore held for 10 days, they can earn 2.5% interest of ₹6.84 lakh.

Bank Term Deposits (FD):

This option usually offers higher interest rates of 6% per annum (illustrative).

But they have pre-determined lock-in periods with exit costs that remove the liquidity benefit of their money, which investors may need in 10 days.

Bank Sweep Deposit arrangement:

This is a specially set-up automatic arrangement with the bank, working like an auto-triggered FD. When a current account crosses a threshold, the excess is transferred to a deposit account where it can earn a higher interest of 6% every year (illustrative). If the current account value drops below the threshold, the deficit is swept back from the term deposit. This arrangement uses the benefits of liquidity of a current account and the interest-earning capacity of a term deposit account.

Assuming a ₹5 lakh threshold set by a bank, 6% interest on the excess of ₹100 crore for 10 days = ₹16,35,616.43 ~ ₹16.35 lakh

But a deposit/sweep arrangement is still a deposit under a single bank, and that poses a high default risk. If this single bank fails, then the entire ₹100 crore is at risk. The Deposit Insurance and Credit Guarantee Corporation (DICGC) does insure eligible bank deposits up to ₹5 lakh per depositor per bank, including principal and interest, according to the DICGC website. But that does not negate the high risk involved with such a large investment, and the attractive sweep deposit rate of 6% remains unconvincing.

Still, the certainty of a return can be a highly attractive factor in choosing this option.

Overnight Mutual Funds:

These funds usually offer return rates of 6% (illustrative), similar to interest rates from Sweep Deposit arrangements and Term Deposits, but higher than a Current Account. Some overnight funds may even offer returns higher than 6% (illustrative).

6% interest on ₹100 crore for 10 days = ₹16,43,835.61 ~ ₹16.43 lakh

For corporations, the ~₹16.43 lakh extra earnings over those from current accounts is significant.

For HNW individuals who can use a Savings account, the difference may be less but still important. For them, between accounts offering 2.5% interest and 6% return, the extra earned is almost ₹9.59 lakh.

As the securities underlying these funds mature in only 1 business day, these funds have low interest rate risk. With a single day to maturity, the interest rates of the securities remain relatively stable, leading to a fund NAV that fluctuates less. This is unlike most other mutual fund types, where the direct consequence of those funds being held for longer periods exposes them to changing interest rates and NAV.

The only caveat is that, still being a mutual fund, that 6% return is not guaranteed.

The comparison makes the case that among these four options, overnight funds seem to offer the strongest combination of nominal returns and liquidity to grow your idle money sitting in a bank account.

Effect of Inflation on Interest and Returns:

Interestingly, the actual interest rates or return rates offered are further negated by inflation. Comparing the options with an assumed average inflation rate of 4% (illustrative) can throw light on any losses that may be happening.

Overnight funds clearly show value in the form of purchasing-power-adjusted Real Returns.

Misconception 2: "Overnight funds are risky. If the borrower defaults, I lose my money"

Overnight funds are not completely risk-free, but they are the best low-default-risk option among mutual funds. They are even better than bank deposits, as these funds have investments spread across many securities, due to which the risk from a single default or the chance of multiple defaults affecting the investor is low. Defaults can still happen, but this diversification ensures adequate protection for the investor.

For an investor, this diversification will generally limit the damage from a single insurer's failure on their ₹100 crore investment.

Misconception 3: "Overnight funds are not Liquid enough. They have Lock-in Periods, Exit Load, and Redemption Taxes"

Overnight funds do not have lock-in periods. The underlying securities mature in a single business day, but the fund units have no such commitment periods. The investor can withdraw the ₹100 crore the next day if they want.

Overnight funds do not have any exit loads.

Gains from Overnight funds are taxable. For corporations, the gains are taxed following Section 115BAA (1) of the Income Tax Act, 1961, while for individuals, the gains are taxed according to tax slab rates defined in Section 25, Finance Act 2025, an amendment to Section 115BAC, Income Tax Act, 1961.

For example, an Indian domestic company incorporated in India is engaged in a manufacturing business, with annual turnover below ₹400 crore. The company has opted to be taxed under Section 115BAA, which provides a 22% corporate tax rate. An additional surcharge of 10% applies to the base tax under Section 115BAA, along with health & education cess of 4%.

Effective Tax rate = 22% × 1.10 × 1.04 = 25.168%
For ₹100 crore held for 10 days, the tax on gains of ₹16,43,835.61 = ₹11,334.80
Redemption amount = ₹16,32,500.80 ~ ₹16.32 lakh

This tax deducted for this company seems negligible compared to the total investment amount.

As a second example, an HNW individual investor earning more than ₹24 lakh a year and with a gain of ₹16,43,835.61 on the ₹100 crore investment would be taxed at the 30% income slab rate.

Tax on gains = ₹13,510.97
Redemption amount = ₹16,30,324.63 ~ ₹16.30 lakh

Why SIPfund?

Overnight funds can seem less attractive and complicated at first. That is why SIPfund can help large-ticket investors understand why overnight funds might be better suited to their institutional or personal finance needs.

1. Overnight funds were thought to be similar to banks in terms of return rates. The SIPfund app can help you find overnight funds that yield better than banks and will present you with choices that match your growth and liquidity needs.

   The SIPfund’s advisory team will help you compare how much money you would be losing out on for choosing various deposit products, and explain to you the benefits of the low interest rate risk of overnight funds.

2. Overnight funds were thought to be risky, like all mutual funds. SIPfund’s advisory team will explain to you the implications of its inherent low default risk, as your investments are diversified among many insurers and instruments. As such, there is less chance of you losing your money.

3. Overnight funds were thought to have a lock-in period, exit load, and significant redemption taxes. Visiting the SIPfund app and talking to SIPfund’s advisory team will show you clearly that overnight funds have no lock-in commitments or exit loads. You can park your money for a minimum of 1 business day and withdraw it with interest.

   The SIPfund team also provides investors with the Capital Gains Report that clearly displays the redemption taxes personalized for their investment and holding period.

What Next?

Do you have surplus cash that you want to park? Talk to SIPfunds’ advisory team at 95133 55661 /62 /63 /64, and we will clarify your questions in under 60 minutes. You can also connect on WhatsApp.

Want to invest in an Overnight fund that suits the requirements of your company? Call our advisory team, and we will set up your investment account.

Want to invest in an Overnight fund as an individual? Visit the SIPfund App (iOS or Android) and start your account using these 5 steps:

1. Enter your personal details: Name, Relations, Occupation, Address, Contact details, PAN details, and Nominee details.
2. Enter your bank details.
3. You will receive a confirmation email from the National Stock Exchange (NSE) with your Unique Client Code (UCC), which is to be verified with an OTP.
4. On the App, go to E-Mandate and set up the money transfer method for automatic payments from your bank account.
5. Next, go to Plans and choose the fund, the investment amount, and the method: SIP or Lump-sum.

You are all set.

Happy Investing!

<i>Disclaimer: The information provided in this article is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any mutual fund. Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.</i>