Overnight fund liquidity: Understanding the liquidity options offered by overnight funds

To keep their finances moving and afloat, people often explore different liquidity options to maintain their financial stability. Overnight funds offer one such opportunity where investors can invest in securities having maturities of up to one day and can redeem their funds instantly with almost no interest rate and credit risk. These securities and assets include CBLOs (collateralized borrowing and lending obligation), overnight reverse repos, and other debt or money market securities.

Redemption from overnight funds is generally credited in the recipient’s bank account within T (Transaction) +1 working day. But to ensure faster access to funds, these funds now provide an instant access facility (IAF) which was previously limited to just liquid mutual funds. However, there are certain factors that need to be taken into account. Take a detailed look into this liquidity option offered by overnight funds and how it can be leveraged to your advantage.

Instant access facility in overnight funds and benefits

Securities and exchange board of India (SEBI) has permitted asset management companies to provide an instant access facility for overnight mutual fund schemes from 2021 onwards. The instant access facility allows investors to redeem their investment from overnight mutual fund schemes on the same day they apply for the redemption. With this new facility, investors can get their money within hours or even minutes of making the redemption request.

This facility allows investors to withdraw up to Rs 50,000 or 90% of their total investment amount whichever is lower without the hassles of standard redemption period. Investors can also avail of this facility multiple times during a month if they wish. The 90% limit ensures that additional payments are not made to investors if prospective NAV falls below previous day NAV, thereby impacting their investment value.

The immediate liquidity offered by this facility makes it easy for investors to cash out their investments quickly if unexpected financial issues arise.

IAF facility for instant liquidity can be availed through online mechanism only

The instant access facility is only available for online transactions, making it even easier and faster for investors to get their money securely. Many people prefer this method because it saves time and provides convenience when making transactions online. Plus, with the advent of digital wallets and mutual fund investment apps, investors now have more options when it comes to accessing their funds quickly and with no risk.

To wrap up

From ease of liquidity and better use of surplus funds to low risk factor and safety against market volatility, overnight funds can significantly add value to one’s mutual fund portfolio. Considering its quick liquidity options, these funds offer investors an ideal blend of accessibility and security. In addition, systematic transfer plans (STP) allow investors to strategically route their investments into equity funds over time while keeping the corpus safely held in an overnight mutual fund.

For investors who want more personalised guidance, a financial expert consultant can help lay the framework for a comprehensive investment strategy tailored to their risk appetite and financial goals.

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