Overnight Funds Don’t Yield 6-7%. At Repo Rate 5.25%, the Gross Yield Is 5.0-5.3%. After TER and Tax, You Keep 3.4-3.6%.
Search “overnight fund returns” and every result says 6-7%. That number is wrong in April 2026.
The RBI has cut the repo rate from 6.50% to 5.25% since February 2025. Overnight funds invest in TREPS and reverse repo — instruments whose yield tracks the repo rate within 24 hours. The 6-7% figures on comparison sites are trailing returns from a higher-rate environment.
Here’s what overnight funds actually yield right now, and why most retail investors should use something else.
How Overnight Fund Yields Are Set
Overnight funds buy one thing: securities that mature in 1 business day.
In practice, this means:
- TREPS (Tri-party Repo): Collateralized overnight lending through CCIL. Yield tracks the RBI’s policy corridor.
- Reverse repo with RBI: Direct overnight lending to the central bank at the reverse repo rate.
- CBLO (now TREPS): The old instrument, merged into TREPS in November 2018.
The yield on these instruments is bounded by:
- Floor: SDF (Standing Deposit Facility) rate = 5.00%
- Ceiling: MSF (Marginal Standing Facility) rate = 5.55%
- Target: Repo rate = 5.25%
Overnight fund gross yields hover between 5.0-5.3%, depending on daily liquidity conditions. During tight liquidity days, yields push toward 5.3%. During surplus liquidity, they drop toward 5.0%.
The Real Return Stack: Gross → Net → Post-Tax
| Step | Rate | What Happens |
|---|---|---|
| Gross yield | 5.0-5.3% | What the fund earns from TREPS/reverse repo |
| Minus expense ratio (direct plan) | -0.08 to -0.10% | AMC fees — lowest among all MF categories |
| Net yield | 4.9-5.2% | What reflects in your NAV growth |
| Minus tax at 30% slab (31.2% with cess) | -1.5 to -1.6% | Taxed as STCG at slab rate, no LTCG benefit |
| Post-tax return | 3.4-3.6% | What you actually keep |
For context, a basic SBI savings account pays 2.70%. A large-bank FD pays 7%. An SFB savings account pays 7.0-7.25%.
At 3.4-3.6% post-tax, overnight funds barely beat a big-bank savings account. They lose to everything else.
Why the “6-7%” Number Is Everywhere
The Repo Rate Timeline
| Date | RBI Repo Rate | Approximate Overnight Fund Yield |
|---|---|---|
| Feb 2024 | 6.50% | 6.3-6.5% |
| Jun 2025 | 6.00% | 5.8-6.0% |
| Oct 2025 | 5.75% | 5.5-5.7% |
| Feb 2026 | 5.50% | 5.3-5.5% |
| Apr 2026 | 5.25% | 5.0-5.3% |
When comparison sites show “1-year return: 6.2%,” they’re averaging yields from April 2025 to April 2026 — a period that included months at repo 6.0%+. The trailing number is mathematically correct but completely misleading for someone investing today.
The forward yield — what you’ll earn if you invest today — is 5.0-5.3% gross. Not 6-7%.
Overnight Fund vs Everything Else (Post-Tax at 30% Slab)
| Instrument | Gross Yield | Costs | Net Yield | Post-Tax (31.2%) | DICGC Insurance |
|---|---|---|---|---|---|
| Overnight Fund (Direct) | 5.0-5.3% | 0.10% TER | 4.9-5.2% | 3.4-3.6% | No |
| Liquid Fund (Direct) | 6.3-7.0% | 0.15% TER | 6.1-6.9% | 4.2-4.7% | No |
| AU SFB Savings Account | 7.25% | Nil | 7.25% | 5.08%* | Yes (Rs 5L) |
| SBI Savings Account | 2.70% | Nil | 2.70% | 1.93%* | Yes (Rs 5L) |
| Bank FD (1 year, big bank) | 7.00% | Nil | 7.00% | 4.82% | Yes (Rs 5L) |
| Arbitrage Fund (>12 months) | 6.0-7.0% | 0.30% TER | 5.7-6.7% | 5.0-5.9% | No |
*After Section 80TTA exemption on first Rs 10,000 of savings interest
Overnight funds come second-to-last. They beat only the SBI savings account. Every other option — liquid funds, SFB savings, FDs, arbitrage funds — delivers higher post-tax returns.
The Fund Manager Doesn’t Matter — Here’s Proof
Overnight fund returns across AMCs for the same period:
| Fund (Direct Plan) | TER | 1-Month Return (Annualized) | AUM (Rs Cr) |
|---|---|---|---|
| HDFC Overnight Fund | 0.10% | 5.05% | 10,421 |
| Nippon India Overnight Fund | 0.10% | 5.04% | 7,478 |
| ICICI Prudential Overnight Fund | 0.10% | 5.06% | 6,200 |
| SBI Overnight Fund | 0.10% | 5.03% | 14,000+ |
| UTI Overnight Fund | 0.10% | 5.05% | 5,559 |
| Kotak Overnight Fund | 0.10% | 5.04% | 8,200 |
The return spread across all overnight funds is 0.03%. Three basis points. That’s Rs 30 per year on Rs 1 lakh.
There is no fund manager skill at play. The only variable is TER — and most direct plans already charge 0.10%. Pick any large AMC’s direct plan and move on.
Who Actually Needs Overnight Funds
Corporate Treasuries
Companies with Rs 50 crore+ in daily float need to park cash overnight. They can’t use savings accounts (current account rates are 0%). Overnight funds are the only option that earns any return on truly overnight money. This is the product’s intended use case.
Parking Proceeds for 1-2 Days
If you’ve redeemed an equity fund and want to park the proceeds for 1-2 days before investing elsewhere, overnight funds avoid the liquid fund exit load (which applies within 7 days). On Rs 10 lakh for 2 days, the liquid fund exit load would be Rs 130. The overnight fund yield for 2 days would be Rs 280. Net difference: Rs 150. Meaningful only for very large amounts.
You Can’t Sleep With Any NAV Fluctuation
If you’ve seen a liquid fund’s NAV dip by 0.01% and panicked, overnight funds are psychologically safer. The NAV has never dropped on a daily basis in India’s history. But this peace of mind costs you 0.8-1.2% per year in lower returns compared to liquid funds.
Who Should NOT Use Overnight Funds
- Emergency fund holders: Use liquid funds (higher yield) + SFB savings account (DICGC insurance)
- Anyone parking money for 1 week+: Liquid funds yield 0.8-1.2% more with negligible additional risk
- Retail investors below 30% slab: SFB savings at 7%+ beats overnight funds at every tax bracket
- Anyone who read “6-7% returns” and invested: Your forward yield is 5.0-5.3%, dropping further if RBI cuts again
What Happens If RBI Cuts Further
The MPC maintained repo rate at 5.25% in April 2026 with a neutral stance. If inflation stays within the 4-4.6% target band, further cuts are possible.
| If Repo Rate Falls To | Overnight Fund Gross Yield | Post-Tax (30% slab) |
|---|---|---|
| 5.25% (current) | 5.0-5.3% | 3.4-3.6% |
| 5.00% | 4.8-5.0% | 3.3-3.4% |
| 4.75% | 4.5-4.8% | 3.1-3.3% |
| 4.50% | 4.3-4.5% | 3.0-3.1% |
At repo rate 4.50%, an overnight fund post-tax return of 3.0% is barely above a big-bank savings account’s 2.70%. The product becomes pointless for retail investors.
The Bottom Line
| Your Situation | Use This | Not This |
|---|---|---|
| Parking money for 1-2 days | Overnight fund | Liquid fund (exit load applies) |
| Parking money for 1 week to 3 months | Liquid fund (direct) | Overnight fund (0.8-1.2% less yield) |
| Emergency fund (3-6 months expenses) | SFB savings + liquid fund mix | Overnight fund (lowest yield option) |
| Long-term surplus (6-12 months) | Arbitrage fund | Any of the above (equity tax treatment wins) |
Overnight funds are a corporate treasury product marketed to retail investors with inflated trailing return numbers. At 5.0-5.3% gross yield, they serve exactly one purpose: parking money you need back tomorrow. For everything else, there’s a better option.
Related reading: Liquid funds vs 7% savings accounts — the real math | Debt mutual funds are dead for 30% slab investors