Overnight Funds are a type of open-ended of debt schemes that invest in debt securities maturing the next day. This means, the fund manager sells the maturing securities in the portfolio every day and uses the proceeds to buy new securities for the portfolio maturing the very next day. Since the securities in these funds mature the next day, these funds are not exposed to the kind of interest rate risk or default risk like the rest of the debt funds. This low risk profile also implies they offer the least return.
Overnight funds are suitable for parking your money for few days. You can invest in these funds for just a day or longer depending on your need. They are ideal for building Emergency Funds wherein you can set aside some money for Emergency needs and invest in these funds to earn some growth while having the fund handy since these funds also offer the highest liquidity.
Since they carry the least risk, conservative and new investors can try out these funds before committing their hard-earned money into other kinds of funds.