Due to recent downgrading episodes of several corporates like IL&FS and DHFL, many liquid funds posted steep losses as they were having exposure to these companies. It made the investors aware that debt fund investment isn’t completely risk-free.

While liquid funds were widely perceived to be a safe and better alternative to short-term deposits offered by banks, their popularity has waned in recent times.

Plus, in March 2019, the regulator notified about valuation norms of money market and debt securities. Owing to that, it has become difficult to bring a sizeable part of the portfolio to less than 30-day maturity considering the large asset size of the Liquid funds. Besides, the net asset value of Liquid Funds would reflect the actual return profile considering the impact of ultimate loss, as indicated by the fund house.

Investors have become more conservative and vying for options that are less risky. And the overnight fund is a plausible choice.

Overnight fund is a category of debt scheme emerged after the SEBI’s recategorization norms.

It has the shortest investment duration of one day and provides better returns than bank FDs and are more liquid. The interest rate risk involved therein is near zero. However, there can be a reinvestment risk, i.e. overnight funds may not be able to reinvest their proceeds at the same rate of return, but at least that doesn’t cause any capital erosion.

On the risk-return spectrum, overnight funds are placed lower that carries the least amount of investment risk among fixed income funds.

Graph: Indicative Risk Return Matrix of Fixed Income Funds

^^General strategy followed by the fund categories. The above list is not exhaustive and for illustration purpose only
* Typical duration/maturity period of the investment securities where the fund invests
$Overnight Fund redemption –the fund endeavours to make the pay-out within one business day on redemption.
1An open-ended debt scheme investing in instruments with Macaulay duration between 4 to 7 years
2An open-ended debt scheme investing in government securities across the maturity
3An open-ended short-term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years
4An open-ended ultra-short-term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months
5An open-ended low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months

(Source: HSBC Overnight Fund Product deck)

Hence, HSBC Mutual Fund launched an open-ended debt scheme, HSBC Overnight Fund (HOF).  It will invest predominantly in debt, money market instruments and cash & cash equivalents having a maturity of one business day.

Thus, it is suitable for conservative investors who want to park their surplus money for a time period of one month or less than a year, build an emergency fund and want to earn a reasonable return with high liquidity.

Table 1: NFO Details

Type An open-ended debt scheme investing in overnight securities. Category Overnight Fund
Investment Objective To offer reasonable returns commensurate with low risk and a high degree of liquidity through investments in overnight securities.
However, there is no assurance that the investment objective of the Scheme will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 1,000 per unit
  • Direct*
  • Regular
* Default option
  • Growth*
  • Dividend
  • Re-investment Facility
  • Pay-out Facility
*Default option
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Kapil Punjabi Benchmark Index CRISIL Overnight Index
Issue Opens: May 21, 2019 Issue Closes: May 22, 2019

(Source: Scheme Information Document)

How will HSBC Overnight Fund allocate its assets?

Under normal circumstances, the scheme’s asset allocation pattern will be as under:

Table 2: HOF’s Asset Allocation

Instruments Normal Allocation (% of Net Assets) Risk Profile
Debt, Money Market instruments, Cash and Cash Equivalents (including Repo) with overnight maturity / maturing on or before next business day Up to 100% Low

If the Scheme decides to invest in securitised debt, it is the intention of the Investment Manager that such investments will not normally exceed 10% of the corpus of the Scheme. The scheme will not invest in Derivatives, Foreign Securities, Credit Default Swaps, Securities Lending and Short Selling. The investments under the Scheme would be in Triparty Repo, reverse repo, debt and money market instruments and cash and cash equivalents with overnight maturity / maturing on or before next business day. The Scheme may invest in Repo / Reverse Repo transactions in Corporate Debt Securities maturing overnight in accordance with guidelines issued by SEBI from time to time.

(Source: Scheme Information Document)

What will be the Investment Strategy?

The aim of HSBC Overnight Fund is to offer reasonable returns commensurate with low risk and a high degree of liquidity. The scheme will have low risk and offer a very high degree of liquidity as it will invest only in overnight securities.

Investments would be made normally in overnight securities including Tri-party Repo / Reverse repos, debt instruments with overnight maturity/liquidity.

Since investing requires disciplined risk management, the AMC would incorporate adequate safeguards for controlling risks in the portfolio construction process.

Since providing liquidity is of paramount importance, the focus will be to ensure liquidity while seeking to maximise the yield. A mix of money market and debt instruments will be used to achieve this. The Investment Team of the AMC will carry out rigorous in-depth credit evaluation of the money market and debt instruments proposed to be invested in.

The credit evaluation of the issuer includes:

  • A study of the operating environment,
  • The past track record,
  • The future prospects,
  • The short term / long term financial health.

The Scheme may invest in unlisted, privately placed, unrated debt securities subject to the prescribed limits, from issuers of repute and sound financial standing. If the investment is made in unrated debt securities, the approval of the Board of the AMC and the Trustees or the Investment Management Committee (within the broad parameters approved by the Board of the AMC and the Trustees) shall be obtained, as per the Regulations.

The fund may invest a part of the portfolio in various debt securities issued by corporates and/or state and central government. Such government securities may include securities which are supported by the ability to borrow from the treasury or supported only by the sovereign guarantee or of the state government or supported by GOI/state government in some other way.

Who will manage the HSBC Overnight Fund?

The HSBC Overnight Fund will be managed by Mr Kapil Punjabi.

Mr Punjabi is the Vice President & Fund Manager – Fixed Income at HSBC Asset Management (India) Private Limited and has more than twelve years of experience in research and fixed income management.

He has done his graduation (BMS) and post-graduation (MMS) in management studies from Mumbai University. Before joining HSBC AMC, he was a Fund Manager of Fixed Income at Taurus Asset Management Company Limited and Edelweiss Asset Management Limited.

Prior to that at Edelweiss Securities Limited he was an Investment Manager and at Trans Market Group Research (India) Private Limited he worked as Research Analyst and Proprietary Trader.

Some schemes which he manages at the Fund house include, HSBC Equity Hybrid Fund(debt portion), HSBC Regular Savings Fund (debt portion), HSBC Debt Fund, HSBC Short Duration Fund, HSBC Cash Fund, HSBC Low Duration Fund, HSBC Flexi Debt Fund and HSBC Fixed Term Series – FTS 130 to 137, 139 and 140.

Table 3: Performance of the schemes managed by Mr Kapil Punjabi

Scheme Name Benchmark Name Managing Since Scheme Return (%) Benchmark Return (%)
HSBC Cash Fund Crisil Liquid Fund Index Dec-16 7.18 7.19
HSBC Low Duration Fund 7.47
HSBC Short Duration Fund Crisil Short Term Bond Fund Index 6.82 6.77
HSBC Flexi Debt Fund Crisil Composite Bond Fund Index Feb-19 2.78 2.75
HSBC Debt Fund 2.65

(Performance data as on May 20, 2019)

(Source: ACE MF)

As can be seen, the returns of the schemes managed Mr Kapil Punjabi has been in line with the respective benchmark, hence the management style is modest.

The outlook for HSBC Overnight Fund:

HSBC Overnight Fund intends to achieve the objective by investing predominately in overnight securities. The major players in the Indian debt markets today are banks, financial institutions, insurance companies and mutual funds. The instruments in the market can be broadly categorised as those issued by corporates, banks, financial institutions and those issued by state / central governments. The risks associated with any investment are – credit risk, interest rate risk and liquidity risk.

[Read: Can You Ignore Default And Liquidity Risk While Investing In Debt Mutual Funds?]

The liquidity risk in the corporate securities market is higher as compared to that in the case of government securities. But the fund managers of HSBC Overnight fund may invest in securities that could be listed, unlisted, publicly offered, privately placed, secured, unsecured, rated or unrated.

Hence, the actual yields scheme will vary in line with general levels of interest rates and debt/money market conditions prevailing from time to time. HSBC Overnight Fund will be sensitive to systemic liquidity. Excess liquidity may drag the potential return down and vice-versa.

However, if you are extremely conservative and wish to park money for the very short-term, say from day to a week, one can consider an overnight fund as a substitute for holding money in a savings bank account.

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