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.