A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
How safe are overnight funds?
If you are looking for a mutual fund that has no risk of loss, there are none! All mutual funds are subject to one risk factor or another. While mutual funds are subject to market risk, debt funds are subject to interest rate risk and default risk. Among debt funds, the degree of risk is different depending on the average maturity of the portfolio. The longer the maturity of a debt fund’s portfolio, the higher the interest rate risk and default risk.
Overnight funds are a kind of debt fund that invests in debt securities that mature the next day. So these funds have the shortest maturity among all debt funds. Therefore, they have the lowest interest rate risk and default risk. While we cannot assume that overnight funds have no risk to them, it is safe to assume that they have the least risk among all the funds combined. Therefore, they are considered ideal for parking large sums of money for a very short period, taking the least risk when the sole purpose is to ensure that the capital is safe without much expectation of returns.
Overnight funds are suitable not only for larger institutions that have large sums of money, but also for small investors who want to invest their cash for a short time.