How to rebalance your portfolio with overnight funds?

An overnight fund is a debt mutual fund that invests in the money market and debt instruments having a maturity of the next day. Each day, securities and instruments in the debt portfolio mature and the fund manager uses the funds to purchase new securities with the same maturity date. As the instruments in such funds mature overnight, they have reduced risk than other debt mutual funds.

Read on to understand the goal for which you must consider investing in an overnight debt fund and when should you consider rebalancing your investment portfolio containing overnight funds.

You must consider investing in overnight funds in the following two cases

Meet your short-term financial goals

Overnight mutual funds are a prudent option for you if you plan to keep your funds for less than seven days. This is because you can liquidate your investments from this fund within a single day. So, this fund comes with high liquidity, which is not prevalent in liquid debt funds as they tend to levy a withdrawal fee on the withdrawal of your investments within a week.

  • If you are a conservative investor

If you are looking to protect yourself from the volatility of the stock market, an overnight debt fund may be your best bet. You can steadily transfer your capital and returns on equity mutual funds to these funds to protect your investment from market volatilities.

When should you rebalance your investment portfolio containing overnight funds?

You must consider reviewing your portfolio periodically to detect if there are any changes in your investment performance. When you invest in distinct asset classes including overnight funds, the performance of the investment is not bound to remain in alignment with expectations. The returns on your investment portfolio might affect your asset allocation and result in a shift from the projected asset allocation strategy. For instance, if your targeted asset allocation is an 80:20 equity-debt ratio, but over a year, if you witness a change in your allocation to 60:40, then you must consider rebalancing your portfolio. Rebalancing your investment portfolio will allow you to get back to the targeted asset allocation.

When is the right time to perform portfolio rebalancing?

You must target rebalancing your portfolio at least once a year. However, there is an important parameter you must factor in before moving ahead with the rebalancing act. You must factor in the exit load of the fund. While the overnight fund has no exit load owing to its short maturity period, there may be other mutual funds in your portfolio that may have an exit load. You must factor in the exit load if you make the decision to liquidate for a rebalancing act before a specific time period. Note that, the exit load is charged on the redemption of net asset value, and this directly affects the overall investment portfolio returns. Hence, you must ensure to pick those units for liquidation and rebalancing act that have finished the holding period to avoid exit load implications.

Ending note

An overnight debt mutual fund is one of the best alternatives if you are a risk-averse investor looking for an investment option with high liquidity. However, just investing in the fund of your choice is not enough. You must also consider rebalancing your investment portfolio periodically to earn the estimated returns over time.