Overnight funds are a popular short-term investment option that allow investors to earn interest on idle cash balances. With interest rates rising globally, overnight funds have become an attractive parking place for liquidity. Here are 5 key tips for investing in overnight funds based on expert advice:
Look for funds with low expense ratios
When selecting an overnight fund, a low expense ratio is key. The expense ratio is the annual fee charged by the fund expressed as a percentage of assets. Lower expense ratios result in higher net returns. Look for funds with expense ratios under 0.25%. Index-based overnight funds tend to have lower expense ratios.
Prioritize safety and liquidity
The primary goal of overnight funds is preservation of capital and liquidity. Opt for overnight funds from reputable fund houses that invest in high quality debt instruments. Government securities funds provide the highest safety. Also, choose funds that offer easy liquidity – the ability to redeem your investment easily.
Consider returns secondary
While generating returns is important, safety and liquidity are paramount for overnight funds. Hence, chase slightly higher returns only after the minimum safety and liquidity criteria are met. The spread in overnight fund returns is typically very narrow.
Select direct plans
Investing directly in the fund instead of through a distributor allows you to save on commission costs. Direct plans have lower expense ratios than regular plans. However, you need a demat account to invest in direct plans.
Stay updated on changing regulations
Taxation rules and other regulations pertaining to overnight funds are updated frequently. For instance, the 2018 budget introduced a 10% long-term capital gains tax on debt funds held over 3 years. Stay abreast of the latest rules to manage your overnight fund investments efficiently.
With rising interest rates, parking short-term surplus funds in overnight funds can generate better returns than savings accounts. Focus on safety, liquidity and low costs when selecting the right overnight fund.