Overnight Fund: The One-Day Debt Category and What It Really Protects You From

Every few weeks someone asks us where to keep money they will need in ten days. A broker’s ledger pays nothing. A savings account pays a little. A fixed deposit wants a lock-in. The overnight fund is the mutual fund industry’s answer, and it is the plainest debt scheme SEBI allows. It lends money for one day, gets it back the next morning, and does it again. That is the whole product.

Simple doesn’t mean riskless, though, and it doesn’t mean it suits every idle rupee. Below we walk through what SEBI actually requires of an overnight fund, how the NAV cut-off times work when you buy and sell, where it sits on the risk matrix, and a couple of worked examples. The rules come from SEBI’s Master Circular for Mutual Funds as on March 20, 2026 and the original October 2017 categorisation circular. Any rupee amounts or yields in our examples are made up for illustration.

What an overnight fund is under SEBI’s rules

SEBI’s 2017 circular on categorisation of mutual fund schemes put overnight funds first in the list of debt schemes. The definition is one line: investment in overnight securities having maturity of 1 day. The uniform description every such scheme must carry is “an open ended debt scheme investing in overnight securities”.

The current master circular keeps that same definition and adds one carve-out. An overnight fund can put up to 5% of its net assets into government securities or treasury bills with a residual maturity of up to 30 calendar days. That money isn’t there to earn extra yield. The circular says it is for placing as margin and collateral for certain transactions. So when you open a factsheet and see a sliver of T-bills in an overnight fund, that is usually why.

The category definition doesn’t list specific instruments. But the master circular’s credit scoring table, which we come to in the risk section, puts repo on government securities and TREPS (tri-party repo) in its safest bucket, alongside G-secs and cash. Those are the kinds of one-day instruments to look for in an overnight fund’s portfolio.

How it differs from a liquid fund

People mix up the two because they sit next to each other on every fund platform. The rules separate them clearly.

• Maturity: a liquid fund can hold debt and money market securities with maturity of up to 91 calendar days. An overnight fund is restricted to one day.
• Liquid assets rule: SEBI requires liquid funds to keep at least 20% of net assets in liquid assets such as cash, government securities, T-bills and repo on government securities. All open-ended debt schemes other than overnight funds, liquid funds, gilt funds and 10-year constant maturity gilt funds must hold at least 10%. Overnight funds are left out of both floors, which makes sense, because their whole book rolls over every day.
• Stress tests: the master circular asks AMCs to stress test all open-ended debt schemes at least monthly, except overnight schemes.
• Exit load: SEBI’s rule that investors leaving a liquid fund within 7 calendar days pay an exit load is written for liquid funds. Check the scheme information document of any overnight fund for its own load structure before assuming either way.

There is one more quiet difference. When a debt scheme drifts outside its permitted allocation because of a passive breach, SEBI gives most schemes 30 business days to rebalance. For overnight funds that rebalancing period is listed as “Not Applicable”. The portfolio is renewed every day, so there is nothing to glide back into line over a month.

An overnight fund isn’t trying to beat anything. It is trying not to lose your money while it waits for you.

What an overnight fund is not allowed to do

Some of the most useful protections are the things the scheme is barred from. SEBI’s risk management framework for liquid and overnight funds says two things directly:

• Liquid and overnight funds cannot park money pending deployment in short-term deposits of scheduled commercial banks.
• They cannot invest in debt securities that carry structured obligation (SO) or credit enhancement (CE) ratings. Debt securities with a government guarantee are excluded from that restriction.

The categorisation table also allows debt schemes to put a residual portion into InvITs, but it specifically leaves out overnight funds, liquid funds, ultra-short term funds, ultra short to short term funds and money market funds. So you won’t find infrastructure trust units sitting inside a properly run overnight fund.

Put together, these rules close off the usual routes by which a “safe” debt fund ends up holding something that isn’t. We have seen enough credit events in Indian debt funds over the years to know that a short maturity alone is no shield. The rule book here goes further than maturity.

Where overnight funds sit on the risk matrix

Every debt scheme in India has to place itself in one cell of SEBI’s Potential Risk Class (PRC) matrix. The matrix has 9 cells built on two axes.

The first axis is interest rate risk, measured by Macaulay duration. Class I means a maximum duration of up to 1 year, Class II up to 3 years, and Class III any duration. If you want a refresher on why duration drives price swings, our piece on bond duration covers it.

The second axis is credit risk, measured by a weighted Credit Risk Value (CRV). Each instrument gets a score. Government securities, state development loans, repo on government securities, TREPS and cash score 13. AAA paper scores 12, AA+ scores 11 and AA scores 10, falling all the way to 1 for below investment grade. Class A needs a portfolio CRV of 12 or more, Class B 10 or more, and Class C anything below 10.

Now apply that to a fund that lends overnight against government securities. Its duration is about a day, so Class I is easy. Its instruments mostly score 13, so Class A is easy too. That is the lowest-risk corner of the matrix, A-I. The master circular is clear that the PRC cell marks the maximum risk a scheme may take, and that moving into a riskier cell later counts as a change in a fundamental attribute. Always confirm the cell in the scheme’s own documents, and if you want to see how it lines up with the riskometer, read our explainer on the mutual fund riskometer.

NAV cut-off times: when your money actually starts earning

This is the part that trips people up, and it matters more for a one-day product than for anything else. SEBI’s master circular sets specific cut-offs for liquid and overnight funds.

When you buy:

• If the application arrives up to 1:30 pm on a business day and the money is credited to the scheme’s bank account by 1:30 pm the same day, you get the closing NAV of the day immediately preceding the day of receipt.
• If the application arrives after 1:30 pm on a business day, and the funds are credited by the 1:30 pm cut-off, you get the closing NAV of the day immediately preceding the next business day.
• If the application comes in on a business day but the money lands after 1:30 pm, you get the closing NAV of the day immediately before the day the funds are available for use.

When you sell:

• A redemption received up to 3:00 pm on a business day gets the closing NAV of the day immediately preceding the next business day.
• For overnight funds only, an online redemption request gets the same treatment up to 7:00 pm on a business day.
• Requests after those times get the next business day’s NAV.

The 7 pm window for online redemptions is specific to overnight schemes. Liquid fund requests still face the 3 pm cut-off. For someone who decides late in the evening that they need the money, that difference is real.

A worked example: buying on a Tuesday

Take a hypothetical investor, Meera, who sells some shares and wants to park Rs 5,00,000 for a short while. Everything here is invented to show the mechanics.

Case 1. She places the order at 11:00 am on Tuesday and her bank transfer reaches the scheme by 12:15 pm. Both the application and the money are inside the 1:30 pm cut-off, so she gets Monday’s closing NAV, the day immediately before the day of receipt.

Case 2. She places the same order at 2:10 pm on Tuesday. She has missed 1:30 pm, so she gets the closing NAV of the day immediately preceding the next business day. With Wednesday as the next business day, that is Tuesday’s NAV, one day later than in Case 1.

Case 3. She places the order at 11:00 am on Tuesday, but the funds only reach the scheme at 3:45 pm. The application was on time. The money wasn’t. Her units are priced at the closing NAV of the day before the funds are available for use, so the timing of the money decides the NAV, not the timing of the click.

One lesson from this: on a one-day product, a missed cut-off costs you a day of earnings. On a large sum parked for a short time, that is a noticeable share of the total.

A worked example: what the yield actually adds up to

Let’s put rough numbers on it, again purely hypothetical. Suppose an overnight fund’s portfolio is earning an annualised 6.00% before expenses and the plan’s expense ratio is 0.10% a year. The net annualised return is about 5.90%.

Meera keeps Rs 5,00,000 in the fund for 10 days. The rough gain is 5,00,000 × 5.90% × 10 / 365, which works out to about Rs 808. If she had kept the same money for 90 days, it would be about Rs 7,274.

Two things stand out. The gain is small and steady, and that is exactly the point. And the expense ratio matters more than people think, because the gross yield is thin. A plan charging 0.40% instead of 0.10% would give up about Rs 41 of that 10-day gain, roughly a twentieth. That’s why many investors use the direct plan for parking money. Our guide to the mutual fund expense ratio shows how to find the TER on any scheme.

On a product that earns a little every single day, a missed cut-off and an extra 0.30% of expenses are not small details. They are most of the difference.

What an overnight fund really protects you from

Here is how we’d sum up the protection, based on the rules above.

• Interest rate risk: with a one-day maturity, a jump in bond yields barely moves the NAV. A gilt or long-duration fund can lose money in a week when rates rise. An overnight fund mostly just starts earning the new, higher rate the next day.
• Credit risk: lending against government securities, with SO and CE paper ruled out, keeps default exposure low. Low is not zero. A scheme’s documents and monthly portfolio are still worth a glance.
• Liquidity risk: the book matures every day, so the fund has cash coming back every morning to meet redemptions.

What it does not protect you from is just as important. It won’t beat inflation in any meaningful way over long periods, because it earns roughly the overnight money market rate. It won’t protect you from your own timing mistakes with the cut-offs. And it isn’t an instant-access account. Redemption proceeds take time to reach your bank, so check the scheme’s stated payout timeline before you rely on it for a payment due tomorrow.

Who actually uses overnight funds

For individual investors, we think the sensible uses are narrow:

• Parking sale proceeds for a few days or weeks while deciding what to buy next.
• Holding money set aside for a known near-term payment, like a tax instalment or a property down payment.
• As the source fund for a systematic transfer plan into an equity scheme, if the AMC permits it.

If your horizon is several months, a liquid fund or money market fund may suit better, since those take a little more duration and usually earn a bit more for it. If you’d rather hold the cash in your demat account, a liquid ETF is another route, with its own trade-offs on brokerage and exchange pricing. And if you’re tempted to chase yield in debt, read our piece on credit risk funds first, because that is the opposite end of the same shelf.

A quick checklist before you invest

• Confirm the scheme is categorised as an overnight fund and check its PRC cell in the scheme documents.
• Compare the direct plan’s expense ratio across a few AMCs. On this product, cost is most of what separates one fund from another.
• Note the cut-offs: 1:30 pm for purchases with funds credited, 3:00 pm for redemptions, and 7:00 pm for online overnight fund redemptions.
• Look at the latest monthly portfolio. It should be one-day instruments such as TREPS or repo, plus at most 5% in short T-bills or G-secs kept for margin.
• Check the exit load and the redemption payout timeline in the scheme information document.

For the wider picture on keeping losses small when you trade or park cash, our pillar guide on risk management in trading is a good next read.

Disclaimer: This article is for education only and is not investment advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Examples use hypothetical figures. Consult a SEBI-registered adviser before making investment decisions.