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Why do people invest in overnight funds when a savings account could give better returns?

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overnight funds

Embarking on the journey of wealth-building requires savvy choices. Imagine your money resting in your savings account and actively working for you, like a diligent assistant ensuring growth while you sleep – enter overnight funds. While a savings account whispers security, overnight funds shout potential. This isn’t a magic trick but a strategic move.

What are overnight funds?

In the financial market, overnight funds stand out as a distinctive category of debt funds. These funds predominantly invest in short-term instruments with maturities of one day, providing investors with a safe and stable avenue for parking their surplus funds. Unlike the unpredictable nature of equity markets, overnight funds offer a low-risk environment, making them an attractive option for risk-averse investors.

What is a savings account?

While the savings account may be a familiar and easily accessible option, its returns might not always be the most lucrative. Banks typically provide interest rates on savings accounts, which, in many cases, may not even beat inflation. In contrast, overnight funds can deliver better returns due to their strategic investment in short-term instruments.

Why consider overnight funds over savings accounts?

Risk and return

The choice between a savings account and overnight funds also hinges on your risk appetite. Savings accounts are known for their safety, as they are usually insured up to a certain limit. On the other hand, overnight funds, while considered relatively low risk, are not entirely risk free. The value of your investment can fluctuate marginally based on interest rate movements. However, the risk is generally minimal compared to more volatile investment options.

Tax efficiency

One aspect that often goes unnoticed is the tax efficiency of overnight funds. Gains from overnight funds are taxed as short-term capital gains if held for less than three years. This means you are taxed at your applicable income tax rate. In contrast, interest earned on savings accounts is added to your income and taxed according to your income slab. Depending on your tax bracket, the tax implication can vary, making overnight funds a potentially more tax-efficient option.

Financial goals matter

Choosing overnight funds and a savings account depends on your financial goals and risk tolerance. If you prioritise safety and instant access to funds, a savings account may be the right fit. However, overnight funds could be a worthy consideration if you are willing to forego immediate liquidity for potentially higher returns with a reasonable level of safety.

To wrap up

Several compelling reasons exist to consider investing your savings in overnight funds instead of keeping them in a traditional savings account. The potential to earn higher returns and maximise your money’s growth over time is significant. Use an overnight mutual fund calculators in India to determine the potential returns from an overnight fund based on your investment amount and expected average returns.

So, consider this an invitation to explore the world of overnight funds, an opportunity to make your money work smarter, and an essential step towards building a robust and balanced financial portfolio.

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