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Unlocking the Potential of Overnight Mutual Funds: A Guide to Smart Investments
In response to the underwhelming performance of liquid funds, there has been a noticeable pivot towards overnight Mutual Funds as a preferred debt-based investment option. This shift is attributed to the investor-friendly features and associated benefits that Overnight Funds bring to the table. Recognized by the Securities and Exchange Board of India (SEBI) as open-ended debt Mutual Fund schemes, Overnight Funds strategically invest in overnight securities, offering a liquid and short-term form of debt funds.
Investors interested in these schemes can initiate purchase and redemption requests during trading hours. At the commencement of each business day, the Asset Under Management (AUM) is in cash, with bonds being purchased overnight and maturing by the following business day. Fund managers leverage the cash amount to acquire more bonds overnight, creating a cyclical process.
Key Features Making Overnight Funds a Viable Choice:
Short Investment Horizon:
These funds mature in just one day, allowing investors to optimize their cash reserve effectively within a short timeframe.
Low-Risk Profile:
The short investment horizon and instant maturity minimize exposure to risk, maintaining a low-risk profile for the funds.
High Liquidity:
Recognized as highly liquid investment securities, Overnight Funds facilitate efficient and quick access to funds for investors.
Tax Implications:
Similar to debt funds, taxation is applicable to overnight funds. If held for over 3 years, they are subject to long-term capital gains tax with indexation (20%). Without indexation, the tax rate is 10%. For holdings under three years, investors are taxed according to their applicable tax slab. Choosing the dividend option incurs a 29.12% dividend distribution tax.
Benefits of Investing in Overnight Mutual Funds:
Effective Utilization of Idle Funds:
Ideal for investors looking to utilize surplus cash efficiently, these funds offer an opportunity to earn higher returns with minimal risk.
Low-Risk Factor:
As open-ended liquid funds, Overnight Funds carry a low-risk profile, making them suitable for investors with a conservative risk appetite.
Protection Against Market Volatility:
Shielded from the impact of RBI interest rate changes and credit rating fluctuations, these funds offer stability against market volatility.
Ease of Liquidity:
With no entry or exit loads, the funds provide easy liquidity, allowing investors to liquidate their investments in emergencies without compromising the principal amount.
To maximize the potential of investments in Overnight Funds, investors should acquire a thorough understanding of their functioning and dispel any misconceptions regarding risk-reward aspects. Knowledge empowers investors to navigate various market scenarios confidently, ensuring a strategic and informed approach to Overnight Mutual Funds in India.
Unlocking the Potential of Overnight Mutual Funds: A Guide to Smart Investments
In response to the underwhelming performance of liquid funds, there has been a noticeable pivot towards overnight Mutual Funds as a preferred debt-based investment option. This shift is attributed to the investor-friendly features and associated benefits that Overnight Funds bring to the table. Recognized by the Securities and Exchange Board of India (SEBI) as open-ended debt Mutual Fund schemes, Overnight Funds strategically invest in overnight securities, offering a liquid and short-term form of debt funds.
Investors interested in these schemes can initiate purchase and redemption requests during trading hours. At the commencement of each business day, the Asset Under Management (AUM) is in cash, with bonds being purchased overnight and maturing by the following business day. Fund managers leverage the cash amount to acquire more bonds overnight, creating a cyclical process.
Key Features Making Overnight Funds a Viable Choice:
Short Investment Horizon:
These funds mature in just one day, allowing investors to optimize their cash reserve effectively within a short timeframe.
Low-Risk Profile:
The short investment horizon and instant maturity minimize exposure to risk, maintaining a low-risk profile for the funds.
High Liquidity:
Recognized as highly liquid investment securities, Overnight Funds facilitate efficient and quick access to funds for investors.
Tax Implications:
Similar to debt funds, taxation is applicable to overnight funds. If held for over 3 years, they are subject to long-term capital gains tax with indexation (20%). Without indexation, the tax rate is 10%. For holdings under three years, investors are taxed according to their applicable tax slab. Choosing the dividend option incurs a 29.12% dividend distribution tax.
Benefits of Investing in Overnight Mutual Funds:
Effective Utilization of Idle Funds:
Ideal for investors looking to utilize surplus cash efficiently, these funds offer an opportunity to earn higher returns with minimal risk.
Low-Risk Factor:
As open-ended liquid funds, Overnight Funds carry a low-risk profile, making them suitable for investors with a conservative risk appetite.
Protection Against Market Volatility:
Shielded from the impact of RBI interest rate changes and credit rating fluctuations, these funds offer stability against market volatility.
Ease of Liquidity:
With no entry or exit loads, the funds provide easy liquidity, allowing investors to liquidate their investments in emergencies without compromising the principal amount.
To maximize the potential of investments in Overnight Funds, investors should acquire a thorough understanding of their functioning and dispel any misconceptions regarding risk-reward aspects. Knowledge empowers investors to navigate various market scenarios confidently, ensuring a strategic and informed approach to Overnight Mutual Funds in India.
Author
Pluto Team
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