When you need a secure place to park your money for just a day or two, Overnight Funds are one of the most reliable options. These funds belong to the debt mutual fund category and invest in securities that mature in one day. This ultra-short maturity makes them virtually risk-free from interest rate fluctuations and credit defaults.
Overnight funds are perfect for individuals or businesses looking to earn slightly better returns than a savings account without compromising on liquidity. You can redeem your investment the next day, making them ideal for managing temporary surplus cash or emergency funds.
Taxation and How to Claim Tax Benefits on Mutual Funds
While overnight funds offer safety and liquidity, they do not provide direct tax benefits like Equity Linked Savings Schemes (ELSS). However, understanding taxation is crucial. Returns from overnight funds are treated as capital gains. If you hold them for less than three years, they are taxed as short-term capital gains according to your income slab. For longer holding periods, indexation benefits apply under long-term capital gains tax.
If your goal is to claim tax benefits on mutual funds, you’ll need to explore options like ELSS, which qualify for deductions under Section 80C of the Income Tax Act. Overnight funds, on the other hand, serve a different purpose—liquidity and safety—not tax savings. A smart strategy could be to use overnight funds for short-term needs while allocating a portion of your portfolio to tax-saving mutual funds for long-term benefits.
Returns and Suitability
Overnight funds typically offer annualized returns of 3–4%, which is modest but better than leaving cash idle. They are best suited for investors who prioritize capital preservation and instant access over high returns.
Overnight funds are an excellent tool for short-term cash management. While they don’t help you claim tax benefits on mutual funds, they complement a well-structured portfolio that includes tax-saving options for long-term planning.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.