Mastering Overnight Liquid Funds with Zerodha: A Step-by-Step Guide
Understanding Overnight Funds with Zerodha
Overnight funds are a financial tool that can be leveraged to manage unused capital during the SEBI Quarter End Settlement, also known as the Quarterly Settlement. These funds are designed to invest in securities with a maturity of up to one day, completely removing interest rate risk and offering flexibility with no lock-in period.
In simpler terms, an overnight fund allows you to use your unused money in your Zerodha trading account for an additional day without incurring any additional costs or complications. They invest in fully collateralized instruments such as Tri-party Repo (TREPS), Repo, and Reverse Repo, ensuring there is no default risk. The returns on these funds are in sync with the RBI Repo rate, making it a reliable investment option.
Key Characteristics of Overnight Funds
The advantages of using overnight funds are numerous. Firstly, there is no lock-in period, allowing you the flexibility to stay invested as long as you see fit. Secondly, since the investments are fully collateralized, the risk of default is eliminated. Moreover, the returns closely follow the RBI Repo rate, providing a predictable income stream.
How to Use Overnight Funds with Zerodha
If you don’t utilize all your funds for an overnight position, you can opt to purchase liquid bees or liquid mutual funds on any day within a quarter and then sell them the next morning as soon as the market opens. This strategy ensures that the funds are debited after the market closes and credited before the next day's opening, all without incurring brokerage or STT charges. This way, your funds remain accessible and you avoid any bank or gateway charges.
How Zerodha Handles Quarterly Settlement
SEBI has mandated that every broker must clear and pay out unused funds every quarter, known as the Quarterly Settlement. This rule was introduced around 2009. However, there are exceptions – balances less than 10,000 INR or 50,000 INR in commodity, and a 125 margin is allowed if you have an open position.
According to Zerodha’s system, the actual cash left in your account is checked, and a certain amount, such as 1 lakh invested for the long term, 2 lakhs used for swing/intra trading, and 1.5 lakhs as cash, will be considered. Zerodha will refund the remaining 1.5 lakhs to your bank account automatically, even if you haven’t requested a refund. This means the next day, you will only see 3.5 lakhs in your Demat and the rest 1.5 lakhs transferred to your bank account.
Problem: This can create a problem if you need those 1.5 lakhs the next day for trading. To overcome this, Zerodha offers the usage of Overnight Liquid Funds. If the refund is due today, instead of a refund, Zeroda will invest the 1.5 lakhs into an Overnight Liquid Fund at the end of the market and then liquidate the position immediately the market opens the next day.
Why Use Overnight Funds?
Using Overnight Liquid Funds provides a solution to the inconvenience mentioned earlier. Your money remains in your Demat account, allowing you to use it as you see fit the next day. Since liquid funds do not fluctuate much overnight, there is a very slight risk involved. However, this is still a non-risky option compared to other market instruments, and you must opt-in to use Overnight Funds instead of an NEFT transfer.
To enable Overnight Liquid Funds in your profile, visit the relevant section on the Zerodha platform and set the preference appropriately. This ensures that Zerodha will handle any unused funds through these liquid funds, thus keeping your account more fluid and free from unnecessary complications.