Understanding overnight fund portfolios

These funds do not chase return,overnight funds portfolio changes every day,they have to reinvest the capital again the next day and the portfolio composition can change,they may choose the safest instrument backed by the sovereign depending on the options present on that given day.

Please note that all TREPS transactions are also backed by collateral(Gsecs/Tbills or AAA PSU paper with haircut),even if it is a corporate bond.

I was on the understanding that although the duration is overnight, if the other party has excess cash and doesn’t need cash the next day, the contract is extended, again same collateral overnight.

Also the repo trades that are being done are between big institutions, insurance companies, banks and other people with huge cash reservers or requirement.

RBI only comes in the picture if some banks wants money, but nobody wants to do that cause its looks bad since people get suspicious about it’s BS health.

Yes the contract can be extended by a day at a time by mutual understanding,though that is not a certainty and their portfolio composition can change every single day,I was only making a point with regards to comparing the portfolio components between the 2 funds using just a single day of monthly disclosure on their portfolio(Axis and SBI) as someone had said that they may be chasing return.

With regards to reverse repo I was mentioning that it is money that is parked with the RBI by banks,since someone was asking what that was.

Thank for all the comments and replies from @Krishna1, @Billu, @ChaitanyaC, @Investor_No_1. Just to summarize (based on my understanding),

Overnight funds have two “instruments”, if that is the right word. Namely, Reverse Repo and TREPS. Are there any other “instruments” than the ones mentioned?

  1. Reverse Repo: Repo apparently stands for Repurchase Agreement, though I’m unclear what the name means.

    Here the fund just keeps the money with the RBI overnight, and no other entity. The RBI pays the fund some interest in return for the overnight loan. This overnight does not correspond to a formal instrument like a bond.

    Question: Is the fund able to park unlimited funds with the RBI? If so, why? Suppose the RBI doesn’t want the fund to park money with it, for whatever reason. Perhaps it doesn’t want to pay the interest.

    I don’t understand what the latter part of this sentence means, starting with “in this case”.

  2. TREPS: This stands for Tri-party repo. These are loans made by the fund to other entities using the Clearing Corporation of India (CCIL) as a platform. These deals are fully collateralized, meaning that the loan is fully covered by collateral. These collaterals are

    I assume Gsecs stands for government securities. And here PSU would stand for Public Sector Undertaking. And AAA is a rating. But are only AAA bonds used? Question: What does “haircut” refer to here?

    Also, presumably CCIL holds the collateral during the duration of the loan.

  3. Net Receivables: This is just cash that the funds holds to meet redemptions. Though I don’t understand why this is necessary.

Are those all the different possible options? Also

So option (1) or (2) is chosen on whether it is the “safest instrument”? How is that determined?

Also, I don’t know what this means:

Which of these instruments is being referred to here, Reverse Repo or TREPS?

Please let me know whether any of the above is incorrect.

I have some further concerns.

  1. I asked this already, but what oversight processes exist to make sure that the money is invested the way it is supposed to be? I suppose this question could only be answered by someone with insider knowledge.

  2. Are these processes (Reverse Repo and TREPS) essentially bulletproof? Is there anything that can go wrong with them?

  3. Are there reasons for investing in more than one overnight fund? Are there measurable differences in safety between the funds? If one was to prefer one overnight fund over another, what criteria would one use?

  4. Is it better to register with the funds directly, or via some intermediary?

You ask a lot of questions:)

The fund is under Internal supervision and regulatory supervision.

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

The fund manager is not the only one handling everything directly,there is a full team and then of course there are custodians,brokers,bankers,risk committee,trustee etc in the loop.

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.

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).

They are as bullet proof as the Reserve Bank of India and our sovereign.

An overnight fund is not for investing,it is just a temporary home until the money can be deployed elsewhere for optimal returns.
There is no difference between funds,It depends on your own comfort and personal risk management.

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

@faheem
If you are interested please check this one out.

I don’t have anything to add as I don’t have any experience in investing in overnight funds.

If you are concerned about safety, you can also look at treasury bills or Gsecs which come with sovereign guarantee or the liquid fund from Quantum fund house which invests mostly in treasury bills, Gsecs and instruments from high rated PSU companies.

I think you can invest in Quantum liquid fund even if you live in US, I don’t know if you can invest directly in treasury bills and Gsecs.

Hi @Krishna1,

Thank you again for the helpful reply.

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.

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.

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.

Agreed.

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.

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.

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?

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

Hi @ChaitanyaC,

Thank you for your comment. I’m not sure if you are referring to the investor directly purchasing treasury bills and Gsecs, or investing in a fund that invests in them. In the former case, of course it is safe if you wait out the term of the bond. But that might not be convenient. In the case of funds that invest in such things (I believe these are termed gilt funds), there are still risks in the short term because of changes in interest rates. The percentage risk may be relatively slight, but if it’s a large amount of money, it can still be significant. But I’m not very familiar with such details.

Liquid funds also carry some risk in general.

Overnight funds have the lowest level of risk among debt funds, because the bonds mature in one day.

I live in India, not the US, just for the record.

Hi @Krishna1,

Thank you for the link.

I’m planning to park some money in overnight funds, which is why I have been asking about them on this thead.

A list of currently open Indian overnight funds appears below, sorted in descending order by “Net Assets”.

My reason for posting this list is to ask for advice about which mutual fund houses to choose, or alternatively, which mutual fund houses to avoid. I am not very familiar with Indian finance and the history of such firms. Some of them may be known to be unreliable, in which case I would appreciate a heads-up. And are there any objective numerical criteria by which one could evaluate the safety of these funds?

This list was obtained from Value Research
(https://www.valueresearchonline.com/funds/selector/) and generated on
31-May-2020 13:15.

I followed the instructions on How to Choose a Liquid Mutual Fund

starting with

Go to Value Research online. Scroll down to the bottom of the page. You will see Fund Selector under research tools right in the middle of the page.

Based on what I have read (which may be incorrect or incomplete), including the material on this thread, my understanding is that overnight funds are on balance as safe as anything out there. I wrote some points of comparison between savings accounts/FDs and overnight funds earlier in the thread, including but not restricted to safety issues. Whether those comparisons are correct, I do not know.

But in any case, I do not know of any records of people losing money in overnight funds, though people have had problems with other debt funds. E.g. the Franklin Templeton schemes that were recently shut down.

Regardless, it’s still possible that the fund manager could go insane and Bad Things could happen. Therefore, I was thinking of spreading the money across a bunch of funds. I was thinking that 10 funds would be a nice round number, though I don’t know if I can find 10 fund houses that seem reliable. Without further information, I’ll probably choose those overnight funds which have the largest Net Assets, because in India, there is safety in numbers. I’ll probably ignore the Franklin India and Yes funds. I also made a list of the fund houses, which, when sorted in descending order by total Net Assets, looks much the same as the Overnight Funds list.

Having said that, as the table below shows, overnight funds have not been in existence in India for very long. Three overnight funds were launched in 2013, HDFC, SBI and UTI. The rest were launched between 2018-2020.

In the last few days, I’ve been attempting to create accounts on the sites of some of these mutual funds. It seems one has to create a folio and in some cases deposit a minimum amount in the folio before one can create an account, though I have not found this discussed anywhere.

But for most of the fund houses, I’ve had a dismaying amount of difficulty with the sites, which in a number of cases seem to be poorly designed and operated, and in some cases cannot even be relied upon to render reliably. One would think that people with so much money could do a better job.

For example, SBI would not accept my email address - it told me to type in a correct email address. I submitted a complaint, but have heard nothing back. My email address is custom. Sometimes I have found (but only in India) that sites are hardwired to only accept email addresses ending in .com, for no reason whatever.

And I also spent hours struggling with the ICICI Prudential web site, which might best be described as erratic. After creating my account, it wouldn’t let me log in. And somehow my phone number got selected as my username, though I had no recollection of selecting a user name. Then it wouldn’t let me reset my pasword, even though the information was correct, claiming there was no such username and email combination. After a day it stopped claiming that and started showing a random error web page. After that, it let me in and I was able to reset the password, though I still kept having trouble with it randomly logging me out for no reason. The helpline people seems totally uninterested in any of this. And this is the web site of one of the largest Indian fund houses.

Overall, I found this a bit disturbing, and I hope it does not have security implications. And I also hope their financial managers are better than their web designers.

##############################################################

Fund Name Launch Net Assets (Cr)
HDFC Overnight Fund 2013-01-01 18087.0
SBI Overnight Fund 2013-01-01 13529.0
ICICI Prudential Overnight Fund 2018-11-15 11738.0
Aditya Birla Sun Life Overnight Fund 2018-11-01 7071.0
Kotak Overnight Fund 2019-01-15 6687.0
Nippon India Overnight Fund 2018-12-18 4987.0
UTI Overnight Fund 2013-01-01 4254.0
Axis Overnight Fund 2019-03-15 2810.0
IDFC Overnight Fund 2019-01-18 2484.0
DSP Overnight Fund 2019-01-09 1986.0
Tata Overnight Fund 2019-03-27 1902.0
Franklin India Overnight Fund 2019-05-08 1071.0
L&T Overnight Fund 2013-01-01 964.0
LIC MF Overnight Fund 2019-07-18 943.0
Edelweiss Overnight Fund 2019-07-23 913.0
Sundaram Overnight Fund 2019-03-20 725.0
HSBC Overnight Fund 2019-05-22 489.0
Mirae Asset Overnight Fund 2019-10-15 463.0
Mahindra Overnight Fund 2019-07-23 284.0
Canara Robeco Overnight Fund 2019-07-24 258.0
Invesco India Overnight Fund 2020-01-08 222.0
BNP Paribas Overnight Fund 2019-04-12 222.0
JM Overnight Fund 2019-12-03 220.0
Indiabulls Overnight Fund 2019-07-08 190.0
Baroda Overnight Fund 2019-04-25 170.0
PGIM India Overnight Fund 2019-08-27 169.0
BOI AXA Overnight Fund 2020-01-28 83.0
Union Overnight Fund 2019-03-27 32.0
ITI Overnight Fund 2019-10-28 9.0
YES Overnight Fund 2019-08-23 6.0
2 Likes

I don’t have an opinion on which fund is better. I just chose a few random ones.( known names)
I invested in OFs through ICICI direct and Zerodha and it was quite easy to do so without any hassles whatsoever.

Hi @kk82,

Thank you for your reply. You mean you didn’t directly invest into overnight funds by going to their web sites, but through third parties like ICICI direct and Zerodha? Do ICICI direct and Zerodha let you track those funds via their websites? Do they charge a fee for the service, and if so, how much? And how many different overnight funds did you invest in?

I had already pointed you toward the MFU India portal ,the portal is equally owned by the AMCs of SEBI registered Mutual Funds in India. and you can buy and sell all direct mutual funds for free from this portal after registering,this is a one time thing and thus you do not have to register with all individual AMC’s.

ICICI Direct,although the name has direct does not allow purchase of direct mutual funds,they only allow regular ones(with higher expense ratios) so they can earn a commission apart from the other charges that they charge for annual maintenance of demat account etc.

Zerodha Coin is free but you will have to deposit funds to your trading account and only then you can transact and then the units of the MF’s are credited to your linked demat account.

Hi @Krishna1,

Thank you for your reply. Yes, you already mentioned MFU India in an earlier post. Thank you.

I’m not sure whether it would be better to go with a centralized system or register with each fund individually. I can see advantages and disadvantages both ways. I definitely don’t want to go through another site if they charge fees, though.

My comment about the web site was a general one, in the sense that if one is entrusting some organization with ones money, that organization really should have a reliable website that functions smoothly. It’s disconcerting when it doesn’t work properly. The question of whether one is actually using that web site is secondary.

Since you are using MFU India, I assume you are satisfied with it.

Do you have any opinion about the specific funds? That was a major part of my question.

I have been investing in Mutual Funds for more that 15 years. Started with advisors (long before direct funds were available), moved over to direct funds using manual applications and am now using the portals. From experience, my order of preference is as follows

  • AMC Portals
    • Pros: You are interacting directly with the AMC. Lesser probability of issues. Any issue, you can raise a ticket and get it resolved. No confusions due to intermediaries.
    • Cons: Multiple logins, UI clutter etc.
  • myCAMS - https://mycams.camsonline.com.
    CAMS are the RTA for a most of the AMCs. The other two RTAs are Karvy and FTAMIL.
    • Pros: CAMS covers a large number of AMCs. I found their portal user-friendly
    • Cons: If you plan to invest in any of the AMCs not serviced by CAMS, this option would not help. For e.g. Franklin is serviced by FTAMIL and Sundaram by Karvy
  • MFU
    • Pros: The entire MF industry is available to invest
    • Cons: (Subjective) I found their portal/app to be unintuitive

If you are looking to invest in just a couple of funds, I would suggest Option #1. (I have 7 active SIPs and a portfolio with 11 AMCs, but still use option 1. Tracking is cumbersome, but got used to it. Takes ~30 min on the first of every month)

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Hi @lsubs,

Thank you for the detailed and helpful reply. As mentioned in my earlier post, I was thinking of spreading my money across maybe 10 overnight funds, assuming I can find 10 AMCs that seem reasonable. While there is little to differentiate the overnight funds, this is intended as a measure to guard against some unreasonable and unexpected catastrophe caused by fund managers or the AMC, like major fraud. Case in point, PMC. Currently I don’t have plans to invest in anything but overnight funds.

I suppose RTA stands for registrar and transfer agents (based on a search). Not really a fan of acronyms.

Do you have any opinions about Mutual Fund AMCs that should be avoided? I see for example that Yes Bank’s overnight fund has almost no Assets under Management, but I don’t know the significance of that.

For similar reasons, I would also prefer to interact with the AMCs directly.
Did you have significant issues with the AMC web sites? As mentioned, my interactions with them have been less than positive. And did you run into any security issues?

I use a selection process rather than a rejection process when shortlisting funds… As an example, for your scenario, I would (hypothetically) use the following factors to decide

  • Fund age
  • Fund AUM
  • Fund Star Rating in ValueResearchOnline and MorningStar
  • AMC size/reputation

(Notice that I have not mentioned past performance/returns. Overnight funds are for safety and not returns)

Based on this, the top 10 overnight funds are

Age AUM Star Rating AMC Size
HDFC Overnight HDFC Overnight ICICI Pru Overnight
SBI Overnight SBI Overnight HDFC Overnight
UTI Overnight ICICI Pru Overnight ABSL Overnight
L&T Overnight ABSL Overnight Nippon Overnight
ABSL Overnight Kotak Overnight SBI Overnight
ICICI Pru Overnight UTI Overnight L&T Overnight
Nippon Overnight Nippon Overnight Kotak Overnight
DSP Overnight Axis Overnight Franklin Overnight
Kotak Overnight DSP Overnight DSP Overnight

You would notice that 8 funds repeat on all parameters and dont have any red-flags. So, in this scenario, we don’t reach a point in the decision tree where we need to eliminate funds (like PMC or Yes). If there were any funds with red-flags, this would be the time when we can validate and remove…

The next step would be to decide on how to execute the transactions after selecting the funds (MFU vs Portal vs CAMS). In the hypothetical scenario/selected funds above, the eight funds are all serviced by CAMS. The easiest would be to use the CAMS portal.

Since my journey started with manual applications, I found the AMC portals a big leap in easing the pain. Also, I have not come across any issues with the portal/process/fraud etc. so far :crossed_fingers:. I continue using the portals since I have already created the logins.
If I were to start afresh today, I would use the CAMS site, instead of MFU. That is purely based on personal preferences. Not any other criteria.

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