Understanding overnight fund portfolios

[faheem]

Hi @Krishna1,

Thank you again for the helpful reply.

@Krishna1

You ask a lot of questions:)

Yes, I do. I hope the discussion will be helpful for other people too. Overnight funds are somewhat underdocumented. The funds themselves don’t seem interested in explaining what is going on.

The focus of this forum is of course, and rightly, on analysing companies, but I think such a discussion has a place too. Because the question of where you keep money when not invested in equities is an
important one.

@Krishna1

The fund is under Internal supervision and regulatory supervision.

That’s nice in theory, but in practice regulatory authorities in India are not functional. And are also not willing to take responsibility for their deficiencies. Nor do they seem interested in improving, or
fixing their mistakes.

@Krishna1

In addition to regulatory limits,usually the sponsors of the fund also prescribe internal thresholds for exposures that may be taken to companies/groups.

That’s interesting.

I read about the meaning of a sponsor of a mutual fund here -
Structure of Mutual Funds | Three Tier Structure-Sponsor, Trust, AMC. It doesn’t say whether a sponsor needs to retain a 40% share in the AMC. Perhaps that’s implied

It seems mutual funds in India are quite new. And overnight funds are even newer.

So (for example) the HDFC Mutual Fund is run by HDFC Asset Management Company Ltd, which is also a publicly traded company.

@Krishna1

But is it impossible for them to commit fraud,the obvious answer is No.
A motivated crook can and will find a way to circumvent the rules.

Agreed.

@Krishna1

So the first thing I look for is the sponsor(Like LIC,HDFC,Kotak,SBI etc) and their credibility.

So I would never invest in a fund where I think the sponsor is not credible(don’t want to mention names).

I understand. One should look for a strong brand name. But Franklin Templeton is also a strong brand name, isn’t it? And that has had problems nevertheless. Though the FT Overnight Fund did not have
problems.

@Krishna1

An overnight fund is not for investing,it is just a temporary home until the money can be deployed elsewhere for optimal returns.

I was using the term “investing” loosely. Putting money in an overnight fund is still technically investing, even if one does not make much money from it.

@Krishna1

I use https://www.mfuindia.com/

It seems that going directly may be better in general, because intermediaries may take money from the fund. Perhaps not all do, and perhaps mfuindia doesn’t. But regardless, dealing directly just feels
better. More layers of indirection could mean information loss, for one thing.

On the downside, keeping track of multiple debt funds could be a pain. I registered with HDFC Mutual Funds recently, and it was quite painful, but was a walk in the park compared to the horrific process
of registering with a broker. On the upside, it was completely automated, and I could put money in the fund immediately after registering, and apparently without any human intervention. Which is
certainly convenient.

My final concern is something that I’ve mentioned before. I am still thinking about the pros and cons of a FD or even a savings account vs an overnight fund. It looks like the advantages of an overnight fund
heavily outweigh that of an FD/savings account, which make me wonder why they are not more popular. Each individual advantage is quite small, but taken together they are significant.

Here are the advantages as I understand them, in no particular order:

1. Interest rates for an overnight fund seem to be consistently better than for a FD. It’s not a huge difference, but it is significant. Maybe a percentage point higher on average.

2. One doesn’t have to worry about an interest penalty when pulling money out of a overnight fund like one does with a FD. Of course there are flexible FDs which don’t exact an interest penalty, so this isn’t a very compelling reason.

3. It’s easier to invest in a group of mutual fund houses than it is to open an account with a group of banks. Based on my limited experience it’s much easier. The paperwork burden is dramatically less
   for a mutual fund than for a bank, was done entirely online, and was immediately active. It did help that I had a KYC registration set up from a previous broker registration.

4. The tax situation is marginally better. Because short term debt is treated like regular income, and the usual tax slabs are applied. However, currently long term capital gains for debt (over 3 years) are taxed at 20% plus indexation, which is much better than the regular taxation rate if you happen to be in the top tax bracket. For FY 2020-2021, the top tax bracket is 30% for taxable income over 15 lakhs.

5. From the important safety perspective, comparing a particular overnight fund vs a particular bank FD, the edge also seems to be with the overnight fund, because (provided the fund manager does what he/she is supposed to) the investor knows what is happening with the money. In particular, the money is basically “there”. It just gets loaned out every day.

   In the case of an FD, what is happening to the money is completely opaque, and one has to trust that the bank will have it available when necessary.

In the reverse direction, I’m trying to think of an advantage than an FD has over an overnight fund, but am having difficulty thinking of one.

I suppose the (extremely limited) deposit insurance provided by Indian banks is an advantage. It used to be 1 lakh but was recently increased (after the PMC debacle) to 5 lakhs. It’s still a paltry amount. I suppose no such guarantees exist for an overnight fund. Also, in practice the government bails out banks if they are in trouble (if they are not cooperative banks), but I don’t know if this is something one can depend on.

Am I missing anything?

@Krishna1

If you are interested please check this one out.

Thank you for the link. Is the recorded session available somewhere?