The overnight market is a money market segment where the term of the security is shortest, just overnight. The borrower or the issuer of the security has to pay back the money in full (principal and interest) at the start of the next business day. The participants in the overnight market are mostly financial institutions. Banks forecast their liquidity needs every day. If they feel they do not have sufficient liquidity to meet their client’s liquidity needs during the day, they will borrow from the overnight market. On the other hand, if they feel that they have excess liquidity, they will lend in the overnight market. Mutual fund debt schemes which invest only in overnight securities are known as Overnight Funds. Previously, these schemes were also known as Cash Management Funds. Overnight debt funds have a maturity profile of 1 day. There is no interest rate risk or credit risk (lending is secured by collateral). Overnight debt funds are the safest category of debt mutual funds.
