How to choose right NAV in overnight funds?
Overnight mutual funds are one of the safest categories of debt mutual funds since their holdings are not actively managed. Most overnight funds have an expense ratio below 1% and their NAVs (Net Asset Value) are also comparatively lower. Investors, however, can benefit a great deal by choosing the right NAV for their overnight fund investment.
How do overnight funds work?
Overnight funds are extremely safe mutual fund investments that pose a very minimal risk to the investor. They are open-ended debt funds that invest in assets or securities having a residual maturity of one day. The Securities and Exchange Board of India (SEBI) introduced these funds as part of its reclassification exercise in 2018. In addition to posing less risk to the investor, the short investment horizon of overnight funds protects investors from the negative effects of market volatility. These funds also do not charge any entry or exit load; and offer higher liquidity to investors.
What is the NAV of an overnight fund?
The Net Asset Value of a mutual fund scheme represents the market value per share for the fund. Investors can calculate an overnight fund’s NAV by dividing the difference of the fund’s total asset value and total liabilities by the number of shares. Open-ended mutual funds like overnight funds have NAVs that help the investor decide whether they must invest in the scheme or withdraw their investment. Here is the formula for calculating NAV:
Net Asset Value = (Total Assets – Total Liabilities)/Total outstanding shares
Tips to choose the right NAV in overnight funds:
Overnight funds generally charge a lower NAV. Here are a few tips that can help you choose the right NAV while investing in overnight funds:
- Check the fund’s expense ratio: Overnight funds generally charge a lower expense ratio from investors since they are not actively managed by fund managers. However, a lower expense ratio can help you benefit from a more favourable NAV. You must, therefore, try and opt for an overnight fund that has a lower NAV.
- Analyse the historical performance of the fund: Before choosing an overnight fund to park your idle funds, you must assess the fund’s historical performance in terms of the returns that it offers. A better performing fund has a positive NAV trend. You can use a mutual fund SIP returns calculator to assess the returns of multiple overnight funds. These free online tools help investors calculate their mutual fund returns on maturity, decide on an ideal investment amount and also decide on an investment tenure. You must, therefore, analyse the fund’s past performance to decide on the right NAV.
- Assess the credit quality of the fund’s underlying assets: Overnight funds generally invest in assets that have a high credit rating. This helps these funds minimize their default risk. Investors must analyse the underlying assets of overnight funds to choose the right NAV.
In conclusion, investors can follow three steps to choose the right NAV for their overnight fund – checking the fund’s expense ratio, analysing its historical performance, and assessing the credit quality of its underlying assets.
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