SUBSCRIBE NEWSLETTER
  • Change Language
  • English
  • Hindi
  • Marathi
  • Gujarati
  • Punjabi
  • Tamil
  • Telugu
  • Bengali
  • MF News Fund houses line up to launch overnight funds, an alternative to liquid funds

    Fund houses line up to launch overnight funds, an alternative to liquid funds

    Seven fund houses are currently offering overnight funds and many more are planning to launch one soon.
    Team Cafemutual Jan 24, 2019

    Overnight funds as their name suggests invests only in overnight securities, which mature the next business day. These funds are a more conservative alternative to liquid funds. While liquid funds can invest in securities with maturity up to 91 days, overnight funds can only invest in securities with one-day maturity.

    Though overnight funds have been around for years, the demand for these funds was muted until September last year. In fact, before September 2018 there were only four overnight funds in the industry (L&T Cash Fund, UTI Overnight Fund (Erstwhile UTI G-Sec Short-term), SBI Overnight Fund (Erstwhile SBI Magnum InstaCash Liquid Floater) and HDFC Overnight Fund (Erstwhile HDFC Cash Management Call)) with combined AUM in August of a little over Rs. 700 crore. All of which were rechristened during the re-categorisation exercise.

    However, the IL&FS default in September and the consequent decline in NAV of select liquid funds spooked markets. Ultra conservative investors moved towards overnight funds. Consequently, we saw three fund houses Aditya Birla Sun Life MF, Reliance MF and ICICI Prudential MF launch overnight funds. In addition, seven fund houses - BNP Paribas MF, Axis MF, Indiabulls MF, Sundaram MF, DSP MF, Kotak MF and IDFC MF have filed draft document for overnight fund with SEBI.

    The category AUM too has grown to nearly Rs. 20,000 crore. The front-runner in this space is HDFC Overnight Fund with assets of Rs. 10,483 crore in November 2018.

    With SEBI expected to announce stricter rules for liquid fund valuation, we may see some volatility in liquid fund NAV going forward. This would further increase the attractiveness of overnight funds.

    Where do these schemes invest?

    With the mandate to invest in one-day maturity securities these schemes invest mainly in tri-party repo (TREPS). Tri-party repo (TREPS) is a type of repo contract where a third entity (apart from the borrower and lender), called a tri-party agent, acts as an intermediary between the two parties to the repo to facilitate services like collateral selection, payment and settlement, custody and management during the life of the transaction. TREPS have replaced CBLO post October.

    The element of safety

    Currently, overnight funds are the safest funds in the mutual fund basket. By investing in securities, which mature the next day they avoid interest rate risk. In addition, as all investments in tri party repos are made through CCIL, an exchange platform, the credit risk is negligible. 

    CCIL requires the borrower to deposit sufficient collateral in terms of highly rated debt securities to cover for the loan. So, in case of default by the borrower, the exchange can sell off the collateral to settle the trade.

    You can recommend overnight funds to your ultra conservative clients who do not want to take any risk on their investment.

    Have a query or a doubt?
    Need a clarification or more information on an issue?
    Cafemutual welcomes all mutual fund and insurance related questions. So write in to us at newsdesk@cafemutual.com

    Click to clap
    Disclaimer: Cafemutual is an industry platform of mutual fund professionals. Our visitors are requested to maintain the decorum of the platform when expressing their thoughts and commenting on articles. Viewers are advised to refrain from making defamatory allegations against individuals. Those making abusive language or defamatory allegations will be blocked from accessing the web site.
    1 Comment
    Rasik Deodhar · 5 years ago `
    Can any AMC /SEBI carify what returns can be expected from OVERNIGHT Funds?
    Login or Sign up to post comments.
    More than 2,07,000 of your industry peers are staying on top of their game by receiving daily tips, ideas and articles on growth strategies. Join them and stay updated by subscribing to Cafemutual newsletters.

    Fill in the below details or write to newsdesk@cafemutual.com and subscribe to Cafemutual Newsletter now.