The Buyt Desk
With REPO rates increasing, the interest rates are expected to rise further and also the stock market is unstable. Hence many are investing in Overnight funds.
Overnight funds are suddenly back in demand as the interest rates have started to firm up. Even the stock market is in turbulence making it difficult for investors to buy shares. As interest rates are rising and are expected to rise further, most investors are taking out money from equity and parking the same in overnight funds. Just in a few months, the returns have increased to 5% which is 2% above the average.
Why are Overnight funds so much in demand?
Overnight funds are considered one of the safest categories when it comes to debt mutual funds. Recently it is attracting fresh interest from investors who are opting to shuffle their portfolios. Many are turning to overnight funds as it is earning better returns and is safe with less risk as compared to the stock market. Even the locking period is very less which is 24 hrs. Because of this feature investors put their money in overnight funds just to safeguard themselves from volatile markets.
Why do investors opt for Overnight funds?
Overnight fund returns are directly proportional to repo rate which means returns go higher when repo rates increase. And Overnight funds do not carry any mark-to-market risk hence carry less risk. Because of this feature, Overnight funds are for risk-averse investors. As overnight funds invest in securities and have a residual maturity of a day, they are considered the safest among debt funds.
When the equity market falls, investors move their money to overnight funds. Usually, this doesn’t happen for a long time but since October 2021 the equity market is not performing well. Because of this, savvy investors have smartly parked their money in overnight funds. We can so confidently say this because the numbers speak loud. There were 1.55 lakh overnight funds folios in October 2021 and this has risen to 5.85 lakh in May 2022. In just 6 months the number has tripled.
What do experts have to say about this?
Most investors manage their portfolios through Fund managers. Fund managers plan their clients’ investments and manage them. Nowadays, because of market conditions and the rise in interest rates, fund managers are recommending overnight funds to their clients. Fund managers are advising equity investors to park their money in Overnight funds for the preservation of capital and later when the market is stable investors can put them back in equity.
Financial experts say that the current elevated market volatility has made many investors move towards Overnight funds. They also say that the minuscule risk of Overnight funds and their quick redemption timelines as compared to direct equity has made investors temporarily park funds in Overnight funds. Experts say that there are many investors who consider markets to be still richly valued and have booked profits in equity. And they are using this category to just park funds and transfer the same to equity funds as soon as market valuations turn attractive.
Summing up
Expects in this field are expecting a further increase in interest rate in the current financial year at least by 100 -120 basis points. Just in the past 2 months, the RBI has raised the key policy rate twice and in total by 90 basis points. So the expected returns from overnight funds are 5.5% or can be more too. Few even go for long duration or gilt funds but there is a mark to market loss. Overnight funds are preferred over these two just because it is not a mark to market loss. It is a good time to park your funds in Overnight funds rather than in the equity market.
Choose wisely. Happy investing.
