Interest rates

Overnight mutual funds: demand for overnight funds is back as interest rates start to firm

Overnight funds — considered the safest category among bond mutual funds — are seeing renewed interest from investors looking to revamp their portfolios. As the stock market faces headwinds and interest rates are expected to rise further, investors are putting money into overnight funds, where yields have risen to nearly 5% from an average 3% a few months ago.

Fund managers have also recommended overnight funds to avoid a loss in market value as interest rates rise, while equity investors put money into this category to preserve capital, before to bring them back into action.

“Overnight fund returns move with the repo rate and have no mark-to-market risk. That’s why risk-averse investors fall into this category,” says A Balasubramanian, MD, Aditya Birla Sun Life Mutual Fund.


Overnight funds are the safest among debt funds because they invest in securities with a residual maturity of one day.

Since October 2021, when the stock market crash began, savvy investors started using overnight funds to park their money. The number of folios in the category increased from 1.55 lakh in October 2021 to 5.85 lakh on May 22, with average assets under management rising from ₹1.16 lakh crore to ₹1.36 lakh crore. During the same period, MF AUM debt increased from ₹14.89 lakh crore to ₹13.62 lakh crore

“The high market volatility, miniscule risk in this category and fast payout times seem to have attracted direct equity investors looking to temporarily park funds,” says Nirav Karkera, head of research at Fisdom. Many investors who think the markets are still highly valued have taken profits in equities and use overnight funds to park money and transfer it to equity funds when market valuations become attractive.

Karkera expects further interest rate hikes of 100 to 120 basis points in the current fiscal year. The RBI has raised the policy rate by 90 basis points over the past two months. “If the expected rise is evenly distributed over the next scheduled monetary policy meetings, investors could earn an annualized return in the range of 5% to 5.5%,” Karkera said.

In the realm of fixed income, many investors prefer overnight funds, as there could be a loss in value in the market in the case of long duration or gilt funds. Over the past year, investors have gained 1.67% in corporate bond funds and 0.04% in gilt funds.