Overnight fund portfolio management: Best practices for creating a well-diversified overnight fund portfolio

Overnight funds are open-ended debt mutual fund schemes that invest in securities or assets with a maturity of one day. The short-term nature of these funds makes them less susceptible to the kind of default risk or interest rate risk like other debt funds.

With features like short tenure, high liquidity, and safety against market volatility, investing in overnight funds can be a great way to generate more income with minimal risk. But to achieve the full potential of your investments, it’s essential to ensure that your portfolio is well-diversified. Having said that, here are some best practices that are worth considering when constructing an overnight fund portfolio.

• Have a short-term goal only

These funds have the shortest maturity among other debt fund types which is why most experts recommend them for short-term goals. You can use these funds to park large sums of cash for a very short period without taking much risk if the sole purpose is to protect capital without much expectation for returns. If you have goals exceeding 3 months or more than 3 months, you can consider liquid funds or short term debt funds accordingly.

• Diversify your investments

Having a diverse mutual fund portfolio allows you to spread out your risks and ensures you are not putting all your eggs in one basket. Make sure to include both stocks and bonds in your portfolio and some cash holdings for liquidity purposes. You should also consider investing in international markets and diversifying across different asset classes, including real estate or commodities.

• Evaluate performance

Overnight funds typically invest in securities with one-day maturities. As such, performance needs to be evaluated on a short-term basis. Consider the one-week or one-month returns of each fund before investing in it. Additionally, look at how much volatility each fund has had over time to determine which funds are more likely to deliver better returns.

• Go for a low expense ratio

When evaluating different overnight funds, pay attention to each product’s expense ratio—the percentage of total assets paid out annually in management fees—as this affects profitability and returns. Generally, lower expense ratios mean higher return on investment since more money is being put back into the account rather than going toward administrative costs. Thus, to maximise your mutual fund investment profits, it is wise to prioritise low-expense funds.

• Read scheme information document carefully

Mutual fund companies offer important scheme related documents such as scheme information document (SID), key information memorandum (KIM), and statement of additional information (SAI).

These documents outline critical information related to each specific fund, such as risk factors, type of the scheme investment objective, who manages the scheme, benchmark index, asset allocation of the scheme, where will the scheme invest, scheme portfolio holdings, etc. Therefore, be certain to read through these documents before making an investment decision.

• Interact with other investors

Reach out to other investors with experience investing in similar funds and ask questions about their experiences with different strategies, tips they have discovered through trial and error, or lessons learned from their successes or failures over time. Interacting with other investors can give you valuable insight into the mutual fund market and guide your decisions when building an overnight fund portfolio.

Closing thoughts

The key to creating a well-diversified, profitable overnight fund portfolio is researching, understanding market trends, and analysing the factors that can affect performance, such as fund manager expenses ratios, risk factors, and asset allocations. With the right approach, techniques, and practices mentioned above, you can create a balanced debt fund investment strategy that includes overnight funds as a key component in achieving your financial goals.