Overnight fund

An overnight fund holds securities that mature the next day, so it carries almost no interest rate risk and very little credit risk. Returns are correspondingly low. It suits money that needs somewhere safe to sit for a few days rather than money you want to grow.

Why it is the safest fund category

Because an overnight fund lends for just one day at a time and reinvests the next, there is barely any window for interest rates or credit problems to hurt it. The holdings turn over constantly at very short maturity, which makes it the lowest-risk category of mutual fund. The trade-off is plain: the lower the risk, the lower the return, so an overnight fund earns only a little, usually close to the overnight money-market rate.

Overnight versus liquid

An overnight fund and a liquid fund are cousins. The liquid fund holds debt maturing within about 91 days, taking slightly more risk for slightly more potential return; the overnight fund holds one-day paper, taking even less. For money you might touch within days, an overnight fund is the more conservative choice; for a few weeks or months, a liquid fund may edge ahead.

What it is for

Use it as a very short-term parking spot: cash awaiting a specific use, the safe leg of an STP, or the most cautious slice of a cushion. It is not a growth investment, and like any fund it is not guaranteed.