The festival of Onam is celebrated on the full moon day in asterism Sravana in the month of August-September. This asterism was sacred to Lord Vishnu. And as King Mahabali was a great devotee of Lord Vishnu the day became sacred for the people of Kerala. They began to celebrate the festival on this asterism as Sravanotsavam or Sravanmahotsav.
Scholars believe that the other name Thiru Onam comes from Sravanotsavam itself. 'Sra' was dropped and 'vana' has come to be called 'onam'. Since the asterism Sravana was sacred to Lord Vishnu, 'Thiru' (equivalent of Sri) was added and it became 'Thiru Onam' or 'Thiruvonam'.
The day of Onam is regarded auspicious and people believe that it is on this day that the spirit of the most benevolent King of Kerala, Mahabali comes to visit his people. The day has mythological significance also, as people believe that it was on this particular day the Lord Vishnu took the avatar of Vamana and sent Lord Maveli to the nether world (patalam).