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Customizing your overnight fund portfolio: Selecting funds for reaching 5 crores gradually

Overnight funds are a type of debt mutual fund that invest in securities maturing in one day. They are considered one of the safest debt funds as they invest in highly liquid and low-risk securities like treasury bills, certificate of deposits, commercial papers etc. The returns generated are similar to savings account interest rates but slightly higher.

Overnight funds allow you easy liquidity as you can withdraw your money the next business day. They are suitable for parking your surplus money for the short term while you decide on other investments. Overnight funds can also work well for your emergency corpus as you can withdraw the funds immediately if required.

Selecting the right overnight funds

Check the size of the fund’s assets under management. Larger AUM indicates the fund’s popularity and liquidity. Review the portfolio holdings to understand the type of instruments the fund invests in. Choose funds investing predominantly in CDs, T-bills, repos etc which are highly liquid and safe. Avoid funds taking higher credit risk.

Compare the expense ratios of different funds. Opt for a direct plan with a low expense ratio so more of your money stays invested. You can build a portfolio of 2-3 good overnight funds from different AMCs to diversify your holdings.

Building your corpus gradually

Assuming you have no existing investments, you will need to invest around 1.2 lakhs per month in your overnight mutual fund portfolio to reach 5 crores in 20 years. This may seem difficult at first but can be achieved through discipline and periodic increases in your investments.

Start small with whatever amount you can invest every month. Maybe 20,000 or 30,000 per month initially. Invest this via SIP in your overnight fund portfolio for the first year. Also build an emergency fund with 3-6 months expenses parked in an overnight fund.

After the first year, analyze your finances to see if you can increase your monthly investments. Aim to increase it by 10-15% every year. Promotions, increments, bonuses, and other windfalls can be used to make additional lump sum investments.

Review your portfolio each year to switch funds or rebalance asset allocation if required. Stay invested through ups and downs in the market. Avoid withdrawing from your corpus before your goal. With periodic investments and disciplined investing, your overnight fund portfolio can help you achieve the 5-crore target over the long term.

Using overnight fund returns

The average returns from overnight funds over the long term is around 6-7%. However, you need to account for inflation which would reduce your real returns to around 4%.

To reach 5 crores in 20 years with monthly SIPs of 1.2 lakhs growing at 10% yearly, you would need an annualized return of around 9% from your overnight funds. This is achievable if you invest in a well-managed fund that generates 7-8% returns along with the power of compounding over time.

The key is to start early, invest regularly, have a long-term horizon, and avoid withdrawing from your corpus before your goal. Be realistic in your return expectations while doing your calculations. Overnight funds with their low-risk profile can help grow your money gradually into a large corpus.

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