How to use overnight funds to manage your cash flow?
Overnight funds are a category of debt mutual funds that invest in securities with very short maturities, usually ranging from 1 day to a few weeks. The funds allow investors to park surplus cash for a very short duration to earn returns without locking in the money for long periods. Overnight funds provide liquidity and aim to give slightly higher returns than savings accounts while carrying relatively low risk. They are suitable for managing short-term cash flow requirements. Read on to find out more about them and learn how you can manage your cash flow with them.
Benefits of overnight mutual funds for managing liquidity
High liquidity
Investors can withdraw money from overnight funds on a daily basis. The funds do not have exit loads or lock-in periods. This makes them ideal for parking surplus funds that may be required at short notice.
Low risk
Securities with overnight maturity have minimal interest rate and credit risk. The returns tend to be steady. This provides safety of capital along with liquidity.
Higher returns than savings accounts
Overnight funds generally provide 50-150 basis points higher returns than traditional savings accounts while providing similar liquidity and safety.
Convenient online access
Investing in and redeeming overnight funds is convenient through online portals offered by fund houses, without paperwork. This enables quick liquidation of funds when required.
Low transaction costs
Overnight mutual funds have lower expense ratios compared to liquid funds or ultra-short duration funds. There are no exit loads which reduces transaction costs while liquidating money.
Strategies to use overnight funds for cash flow management
Parking surplus funds overnight instead of current accounts
Any surplus funds at the end of the day beyond what is required for operations can be moved to overnight funds. This will allow earning returns on the funds instead of keeping them idle. The money can be redeemed the next morning when required for payments.
Meeting urgent cash needs
Overnight funds provide easier liquidity compared to fixed deposits or liquid funds. They can act as a backup source of funds for any urgent cash requirement instead of drawing loans or delaying payments.
Maintaining liquidity for working capital
For businesses that have frequent fluctuations in working capital needs, keeping a portion of cash in overnight funds ensures easy liquidity along with returns.
Route for systematic transfer plans
Investors can move regular surplus amounts from debt funds to overnight funds to deploy at opportune moments instead of current account.
How to maximise returns while managing liquidity?
- Split money across 2-3 overnight funds instead of parking all funds in one scheme. This diversifies risk.
- Analyse returns across fund houses and select ones providing comparatively higher yields.
- Consider growth option instead of dividend payout if liquidity needs are not very frequent. Growth option delivers higher post-tax returns.
- Monitor returns on a periodic basis and switch schemes if any fund starts underperforming peers consistently.
- Maintain other backups for funds requirement instead of relying only on overnight funds to prevent loss of returns on redemptions.
Overnight funds can deliver higher returns than savings accounts without compromising safety or liquidity. Following prudent strategies can help investors and businesses maximize returns on surplus funds required to manage short-term cash flow needs.