Understanding overnight fund portfolios

Hello everyone. This is my first post on this forum. I hope
this post is on-topic. While this post isn’t about investing in
equities, which I think is what this forum is mostly about,
it’s closely connected. Apologies in advance, because this is
going to be verbose.

I’m trying to understand the differences between overnight
funds and a bank savings account or fixed deposit in terms of
safety. These are both common ways to park money for short

I know that overnight fund is a kind of debt fund where the
debt instruments mature overnight. But there are still a number
of things that are unclear to me about it.

My major concern is safety of the principal. But to determine
safety, it’s helpful to know exactly what is being done with
the money. As the saying goes: what you don’t know can hurt
you. And also, the devil is in the details. (The latter is a
saying I really like.)

Traditionally, the standard way in India to hold money is in a
savings account or FD. However, savings accounts/fixed deposits
in India are not safe. Indian deposit insurance is among the
lowest in the world. It was until recently 1 lakh per account,
and I believe that this has recently been increased to 5 lakhs
in light of the PMC debacle. This is in contrast to USD 250,000
for the USA, and Euro 100,000 for the EU. Also, my understanding is that in the case of bank failure, even this amount will not be made available immediately, but only once the bank is liquidated, which may take years.

Since deposit insurance is so grossly inadequate, in case a
bank runs into trouble, it needs to get help from the govt. But
cooperative banks fail all the time, and the govt does nothing
to help them. PMC is just the largest of such events, so made
the news in a way that the others did not. However, the govt
apparently sees nothing wrong with allowing thousands of unsafe
cooperative banks to continue functioning, nor does it try to
protect the public in any way from the possible consequences of
failure. For example, it has never, to my knowledge, ever
issued any safety warnings about banks. So an obvious defensive
ploy is to only keep money in banks that are large enough that
the govt will be compelled to bail it out. The so-called “To
Big To Fail” banks. I checked, and apparently SBI, HDFC, and
ICICI currently fall into that category. But it would be really
nice not to have to depend on a bail out in the event of a

In light of the above, the idea of an overnight fund seems
quite appealing. But it’s a good idea to take a long and hard
look at it first.

The article

is one of the few places where I found a discussion of
comparative risks. The author writes:

Unlike debt funds, the risk of concentration is high in
investments like fixed deposits where investors hold large
sums of money and run the risk of losing it all if things go
wrong. There is very little information available to
investors that they can use to evaluate their investments and
they have very few options for exit or redressal.

Open-ended funds, on the other hand, are required to provide
regular information on portfolio and performance to investors
and can exit at the current value of the units at any time.

So the author is saying that if one has an account with ICICI,
for example, all ones risk is concentrated in one bank/company.

It’s ironical he should mention information on portfolios,
because my question is largely about the overnight fund

In many places, overnight funds are mentioned as an alternative
to bank deposits (savings account or fixed deposit. But it’s
not clear to me how the respective risks compare. I’m also
still not clear what the risk of a overnight fund is,
exactly. It’s described in various places as “low risk”, but
I’m not sure what that translates to in concrete terms.

I know that debt funds in general list their portfolio, so one
should look at that for more details. However, looking at this
hasn’t been particularly enlightening. I looked at some
overnight funds (sample

The SBI fund is the oldest, apparently having begun on October
01, 2002

All the overnight fund portfolios I’ve looked at have the
following in various proportions, but nothing else: Reverse
Repo, Net Receivables, TREPS. Usually one of these three is

For example, the SBI overnight funds breaks down as follows:

Reverse Repo (sometimes just Repo) 99.10%
Net Receivables 0.63%
TREPS 0.27%

I’m not completely sure what any of these terms mean. Here are
some guesses.

Reverse Repo/Repo: This is vague. Repo is short for repurchase
agreement. Repo and Reverse repo are general terms, but it’s
possible it is being used in a specific sense in this case. The
general sense is that some entity (possibly a central bank)
sells a bond to the overnight fund for an overnight people, and
then buys it back the next day at a higher price, i.e. the
original price plus interest. In other words, the entity is
borrowing money overnight from the overnight fund.

In this case, it’s possible that the entity is the RBI, but
this is just a guess. It might be others. And digging around in
the records of overnight funds revealed no additional
details. If the entity that the overnight fund is doing
business with is exclusively the RBI, then an obvious question
then is - is the RBI willing to sell as many bonds as the
overnight fund wants?

TREPS: This appears to correspond to something called a
Triparty Repo (FAQ - TREPS),
which is a repo contract using a third party as
intermediary. Would this third party hold collateral? It’s not
clear. It’s also not clear how this differs from Repo/Reverse
repo. Does Repo/Reverse repo not involve a third party?

I found the Wikipedia Article

helpful when trying to understand what repurchase agreements

Net Receivables: I’m not currently sure what this is. But a
search bought up this question on tradingqna.com,
Net Receivables in Mutual Funds - #5 by Bhuvan - Mutual Funds & ETFs - Trading Q&A by Zerodha - All your queries on trading and markets answered
but I didn’t find the answers there convincing.

Finally, this might be a dumb question, but what is stopping an
individual doing what these funds are doing?


As for Tripartite Repo - this is in regards to US money markets, dunno if applicable here :

Generally only AAA securities are posted as collateral for overnight funding. But many a times the borrower may not have AAA securities. Lets say it has A rated securities. It goes to a bank and submits the A rated security as collateral and get AAA rates securities to post collateral for overnight funding.

There is a haircut involved in these transactions + fees. But still this type of funding is done because the rates are so cheap in overnight funding vs. long term funding. In US it’s generally done by hedge funds for leverage and cheap loans, but since India doesn’t have hedge funds, I don’t know who does it.

One example of overnight fund detailed portfolio. Not much I can see in there except 90.31% in TREPS (not sure what these are, need to check), 9.11% in reverse repo and 0.58% in Net recievables.

If anyone understands what are these, would be good to know. Thanks

Yes, that allocation is typical of all the overnight funds I’ve looked at. See my question.

That’s basically my question. Answers are surprisingly hard to find. I’ve looked.

Yes, but my question is about what this means specifically in relation to an overnight fund. Is the fund manager just lending money on CCIL? Or is something else going on?

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Thats precisely why I was saying that selling equity is easy but what to do with the proceed you get is tougher. All these new types of funds look good until one fine day comes when something collapses…Corporate deposits many retirees bought for higher returns and were sold by brokers etc as “as safe as FD”, then came ultra short term funds and now overnight fund. Now this new category of overnight fund seems special with its uniqueness of “too difficult to understand”. Good that we are digging into it. After seing multiple financial collapses in India in last decade or so, I do not trust anything financial.

A dumb question - How safe are Insurance Annuity which one can buy at a locked predetermined rate of interest. Are these safe and how much is assured by government, if any. Also, as some banks are too big to fail, similarly Insurance is about protection and if a country’s insurance company fails then it may be a bigger blunder and a problem than say a bank failing? In short - is it good to invest in Annuity from Insurance firms for a capital that you need to park and keep safe and use the interest elsewhere? Thanks

I feel the same way. Hence my question. A debt fund manager should be able to answer this question in detail. Are there any on this site? I’ve thought of writing to some, but I’m not sure where to find suitable contact information. Thoughts?

Overnight funds have a maturity of only one day and therefore do not carry interest rate risk.

The Clearing Corporation of India here ensures that counter party risk is eliminated and the system functions smoothly.

Hi @Krishna1,

That sounds nice in theory, but I’d like a more detailed picture of how this works in practice with an overnight fund. Excuse my paranoia, but under the circumstances, paranoia does not seem unreasonable. A detailed picture would include a description of oversight. Suppose the overnight fund manager goes insane and starts doing something different with the money. Would anyone notice? This wasn’t explicitly mentioned in my question, but it’s implicit.

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With my limited knowledge and experience, interest rate in a smaller devil with the bigger one being defaults. Interest rates affect the growth while defaults affect the capital. I would be more inclined to dig on risk of defaults in any fund I invest in or in its underlying assets.

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As far as corporate debt in overnight funds is concerned,it is the CCIL’s job to ensure that all of these are fully collateralized by AAA paper of PSU’s to ensure the elimination of risk.

Hi @Krishna1,

So is money from overnight funds exclusively traded on CCIL? Do you know this for a fact, and if so, what is your source? And can you offer a more detailed picture of how this works? Note TREPS isn’t the only item mentioned in overnight fund portfolios.

I have invested in these funds on a regular basis,so I know a little about them.

Yes,CCIL is the sole central counterparty.

You will have to check which individual funds are investing where,that will be mentioned in their Scheme Information document.

Hi @Krishna1,

I’ve tried reading those things, but got lost. Could you provide an example? Perhaps the SBI overnight fund, which I mentioned in my question, and which appears to be an old fund. Possibly the oldest of the overnight funds.

Here In this fund you can see they have parked 85.63% funds with Reverse repo and about 13.94% they have used TREPS facility.

The remaining 0.43% is the cash component,usually kept to meet redemptions.

Yes, that was in my question too. So Reverse Repo is always money parked with the RBI? And TREPS is always money lent via the CCIL platform? And who handles and oversees these processes The fund manager? Or does he delegate?

So net receivables just means cash held? I read this in another answer, but didn’t believe it at the time.

Yes TREPS is done on the CCIL platform with them acting as a central counterparty to ensure there is no credit risk as they take collateral(usually Gsecs or AAA rated psu bonds with haircut) or interest rate risk because of one day duration and no counter-party risk.

All reverse repo has to be parked with central bank(RBI),this is done by banks,in this case some bank(maybe SBI) may have traded it to them.

I don’t know how to answer this question.

Sbi overnight is super heavy on reverse repo while axis is full on on treps…what are these two trying to do…generate that 1% extra return over other?