Why you should invest in overnight mutual funds over savings & FD account

In today’s volatile market environment, many investors are looking for safe and low-risk investment options to park their short-term savings. The most common options considered are savings accounts, fixed deposits (FDs), and overnight mutual funds. While savings accounts and FDs have traditionally been preferred by conservative investors, overnight mutual funds offer some key advantages that make them a better fit for short-term goals.

What are the main investment options?

Let’s start with a brief overview of the three main short-term investment options available in India.

  • Savings Accounts: Savings bank accounts offered by banks allow you to earn interest on your deposits while maintaining easy liquidity. Interest rates offered are around 3-4% currently. Interest is accrued on a daily basis and credited monthly.
  • Fixed Deposits: FDs allow you to lock into a higher interest rate for a fixed tenure, ranging from 7 days to 10 years, while your capital remains safe. Interest rates depend on the tenure but are typically higher than savings accounts. Interest is paid either monthly, quarterly, or annually depending on the deposit type.
  • Overnight Mutual Funds: These funds invest exclusively in debt instruments with a maturity of 1 day, such as treasury bills, inter-bank transactions, and commercial paper. They offer simple liquidity of 1 day and interest rates linked to overnight benchmark indices like T-Bill rates.

Why overnight funds score over traditional options

While savings accounts and FDs have their place, overnight funds have certain advantages that make them better suited for short-term goals and wealth parking in the current economic scenario.

Higher Returns

With the RBI keeping interest rates low to boost the economy, returns from savings accounts and short-term FDs are quite unattractive at 3-4%. Overnight funds, on the other hand, offer higher returns currently around 5-6% as they benefit from small upticks in overnight rates.

Complete Liquidity

Both savings accounts and overnight funds allow complete liquidity and access to your money within 1 day. While FDs have lock-ins ranging from 7 days to a few months. This makes overnight funds more flexible for unforeseen urgent cash needs.

Protects from Interest Rate Fluctuations

With floating interest rates, overnight funds ensure you capture every small rise in rates without any locks. In contrast, returns from FDs get locked for the entire tenure at the rate prevailing on the day of booking.

Diversification Benefits 

Parking your entire short-term savings in a single bank increases counterparty risk. Overnight funds invest in multiple high-quality debt instruments issued by different entities, reducing concentration risk.

Tech-Enabled Convenience

Opening and managing an overnight fund account is hassle-free with online transactions. Savings accounts still require frequent branch visits for basic tasks.

Key things to consider when investing

While overnight funds are relatively safe, there are still a few factors for investors to keep in mind.

  • Credit Risk: Funds invest in debt issued by banks, corporations, and NBFCs. So evaluate credit quality of individual instruments held. Stick to highest rated funds for complete safety of capital. 
  • Liquidity Risk: Though interest risk is mitigated, there may be lag between submitting redemption request and receiving proceeds during periods of high volumes.
  • Returns Not Guaranteed: Despite low risk, funds do not promise any fixed returns. NAVs will vary based on movements in underlying instruments.
  • Timing Risk: Entry and exit at the wrong time, say during rate cuts or hikes, could impact returns to some extent. Stagger investments for better averaging.


Overnight mutual fund investments are a prudent short-term investment alternative in the current weak interest rate scenario for conservative investors. Their higher post-tax returns, ease of transactions, and protection from interest rate movements make them superior to savings and small-period FDs for liquidity needs ranging from 3-12 months. With the right fund selection and understanding of risks, overnight debt funds can help optimize returns on surplus short-term capital.