A Quick Analysis of Overnight Funds

As an alternative to liquid funds

mutual fund sahi nahi hai

Why am I talking about Overnight Funds now?

I Got hit finally after years of escaping debt fund mayhem! UTI PSU And banking fund is bleeding… Banking and PSU funds are created just for this purpose as they eliminate interest risk compared to Gilt. They are supposed to invest only in Govt backed holdings as per their SID. This case also the SPV has a deal with NHPC, NHPC pays the money to SPV. But since SPV was created by IL&FS, they have stopped payments to adhere to supreme court order of stay. There should not be any credit risk in these family of funds unless the state or central or municipal govt refuses to honor the contract. This SPV was supposed to be the Govt backed deal but this time it failed. This is the only time it failed BTW. Got to know lot about the structure of SPV as I researched. This is an interesting case. Many lawsuits will be filed now saying this SPV is sovereign as payments are from NHPC and this is not linked to parent group IL&FS

Even though it’s a tiny amount as I have invested in many debt funds but this made me lose confidence in debt funds. I am done with them… Already from the past many years, I am building my own NCD, GOI bonds, Treasury list, etc. and accumulating it slowly.

Anyone who has a substantial corpus in debt funds bewareLiquid funds are also risky. Even the most popular Reliance liquid which gives instant money holds many risky instruments! Its AAA just for namesake. Majority of the fund managers are god damn stupid/fraud and change the portfolio like they change their dress. They should be fired and sent to jail literally!

My only rescue funds are overnight and arbitrage fund. But guess what the arbitrage funds are becoming greedy and making the same goddamn mistake of storing junk in debt folio. Overnight fund I am not sure when CBLO guarantee turns out to be fraud.

What is an overnight fund?

An overnight fund has the mandate to invest in overnight securities that have a maturity of as low as one day. They are typically money market instruments viz — Treasury bill (T-Bills).

In contrast, Liquid funds invest in papers up to 91 days of maturity. More than 60% of the Liquid funds AUM is invested in Corporate paper (mostly unsecured) which makes liquid fund riskier than an Overnight fund. Hence Liquid funds could show a drop in NAV just like the other short duration, and credit risk and corporate bond funds did.

The Pros and cons of Overnight Funds

Overnight funds are the lowest in the spectrum of risk returns, i.e., Low risk and Low return. The returns match or slightly exceed the RBI Repo Rate. The RBI repo rate was incidentally was reduced to 5.75 by the recent RBI MPC.

A look at the offering of Overnight funds shows that many funds are less than one year and returns are around 6% … this is likely to fall as the repo rate has been reduced and hence more likely to be below 6% going forward.

These are good for a very short duration instead of Savings Bank.

Only two funds seem to have decent corpus (HDFC and SBI fund offering), and the total corpus across all funds is less than 17000 crores which is a very small compared to what gets invested in Liquid funds.