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Are overnight mutual fund schemes a good choice for ultra conservative investors?

Many debt mutual fund investors wanted to shift from liquid funds to overnight funds after a series of downgrades hit liquid funds.

, ET Online|
Updated: Jul 19, 2019, 11.47 AM IST
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According to the recent Sebi definition, overnight funds are open-ended debt mutual fund schemes that invest in overnight securities with a maturity of one day. This means that the fund manager buys securities on a daily basis in these schemes. These securities mature in a day and the entire cash is deployed in buying new securities. This investment mandate makes these schemes highly liquid.

Overnight funds are touted as the safest among the debt mutual fund categories. This is because due to their very short investment horizon, these schemes are not impacted by interest rate changes and defaults in securities. This is why many investment experts say that these schemes are ideal for anyone who wants to park money with the least amount of risk with a little extra returns.

Many debt mutual fund investors wanted to shift from liquid funds to overnight funds after a series of downgrades hit liquid funds. However, mutual fund advisors say that overnight funds are not the best choice for conservative debt mutual fund investors. “Agreed that the risk in this category of schemes is minimal, but we shouldn’t forget that investors are here for returns. Right now, the debt space is troubled by various issues, thus our focus is safety but we cannot sideline returns in our investments,” says Gaurav Monga, Director, PxG Consultants.

Overnight funds carry negligible risk and are meant for investors who want to park a huge sum for a short time. Corporates put crores of rupees in such schemes because even an inch of up or down can be big for a huge corpus. However, for retail investors earning extra returns can be difficult in overnight funds. “The current situation is not going to last forever. Investing in overnight schemes just because some liquid funds were hit is a wrong way of going about your investments. For your liquid goals, like emergency funds, contingency fund, medical fund, liquid schemes are a better option. Because retail investors will not take their money out in a period of three days or seven days,” says Gaurav Monga. He adds, “The difference in safety is not much but the difference in returns of these two categories can be substantial.”

Just like other debt mutual funds, overnight funds held for more than three years are eligible for long term capital gains tax with indexation. If sold before three years, you have to pay tax as per your tax slab. The fund will be subject to a dividend distribution tax of 29.12% if you opt for the dividend option.
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Are overnight mutual fund schemes a good choice for ultra conservative investors?

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