Applicability of NAV upon realisation of funds to make it difficult to invest in MF at a desired price

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Updated: Sep 18, 2020 7:00 PM

According to the new circular of SEBI, units will be allotted at the NAV applicable on the day of realisation of funds even for investments of less than Rs 2 lakh.

SEBI circular, Sebi circular for mutual funds, mutual funds, Securities and Exchange Board of India, SEBI, Sebi new rules, Net Asset Value, NAV, NAV upon realisation of funds, SIP, cut off timeThe existing provision on NAV applicability for liquid and overnight funds and cut-off timings for all schemes shall remain unchanged.

Mutual Fund (MF) investors, investing less than Rs 2 lakh, get the units allotted at the Net Asset Value (NAV) of the same day on which investments were made, provided the applications are submitted before the cut off time. For investments of Rs 2 lakh or above, units are allotted after realisation of the investment amount.

During the Covid-19 lockdown, the cut off application time for equity-oriented funds has been changed from 3 pm to 1 pm, while that of debt funds has been changed to 12.30 pm.

However, the Securities and Exchange Board of India (SEBI), in its latest circular, said, “It has been decided that in respect of purchase of units of mutual fund schemes (except liquid and overnight schemes), closing NAV of the day shall be applicable on which the funds are available for utilisation irrespective of the size and time of receipt of such application.”

The market regulator, however, has decided that the existing provision on NAV applicability for liquid and overnight funds and cut-off timings for all schemes shall remain unchanged.

So, according to the new order, units will be allotted at the NAV applicable on the day of realisation of funds even for investments of less than Rs 2 lakh.

But how will it benefit the investors and the MF industry?

“Investors stand to gain as there would be uniformity in applicability of NAV, in the process paving the way for a fair and transparent platform. MF industry would be benefited as there would be real time investing and NAVs would be in accord to the market movement subject to fund realisation,” said S Ravi, Former Chairman of Bombay Stock Exchange (BSE) and Managing Partner at Ravi Rajan & Co.

Ajay Sharma, Director & Designated Partner, InvestmentMitra Advisors LLP, however, says, “Many old aged clients and investors in small towns still use cheques to invest into mutual funds. They invest on a particular day to take advantage of NAV of that day by evaluating the market movement of the day before the cut off time. If they are not allowed to do so, they may lose interest in mutual funds and will go for direct stocks. SEBI must have kept their interest also in mind.”

Will it bring higher uncertainty in MF investments regarding the NAV at which the investment will be made?

“There would be no uncertainty as the cut off time period is applicable and provides a level playing field across the investments of either more or less than 2 lakhs. Ambiguity is ruled out as prior to the circular, NAV was subject to the time stamp,” said Ravi.

Sahil Arora – Director,, however, said, “SEBI circular on the applicability of NAV during mutual fund purchase will adversely impact those using cheques to invest in mutual funds. Such investors will get NAV of the day when the amount gets transferred to the fund houses’ accounts. Hence, such investors should shift to digital payment mode to get the same day NAV while investing in mutual funds.”

Will the cut off time of investment to get the same day NAV become irrelevant and efficiency of banks in settling payments become more important?

“Cut off time before 12.30 pm in the debt segment and 1 pm in the equity segment steers towards efficiency and transparency. Banking system needs to be aligned to such MF investments to enable present day NAV for the investors,” said Ravi.

On the other hand, Arora says, “While the cut-off time for executing MF purchase orders remains the same, there is no clarity on whether the same cut-off time will apply to the realisation of funds as well. If the same cut-off time applies to the realisation of funds well, then the new SEBI circular might also adversely impact those investors who tend to submit MF purchase orders very close to the cut-off time.”

How are payments through demat accounts settled? If money goes out of an investor’s account before the cut off time, but the demat platform settles payment with mutual funds at the end of the day, will the investor get the same day NAV of next day’s?

“Currently payments for demat accounts are settled online or through bank transfers. As per the circular, outward remittances towards investments in MF before the aforesaid mentioned cut off time will be reflected on the basis of current day NAV,” said Ravi.

Sharma, however, said, “In day to day business, many a times we face problems especially while executing online transactions regarding receipt of funds. And it takes a considerable amount of follow up with banks, execution platforms and the registrar for getting the due credit. This step will further aggravate the problems.”

Will the investors investing through SIP get NAV of the SIP date?

“In SIP ways of investing, funds are transferred by ECS, EFT or NEFT, thus reflecting the NAV of the SIP date. However, the NAV of the SIP date remains valid if the Banking system enables fund transfer before cut off time,” said Ravi.

“For SIPs registrar uses NACH mandate to draw funds from the bank of investors. There are ample instances where the date of funds debited to the investor’s bank account is different from the date of SIPs. Which is not a fault of the investor. How would the registrar handle such problems and then what will be the use of issuing NACH mandates?” asks Sharma.

“A better way perhaps would be to keep allotted units locked in till funds are not realized. And based on the experience, SEBI may define periods for different type payment systems (RTGS/Cheque/NACH etc.) for confirmation of payment receipt. If payment is not credited to AMC’s bank account within stipulated time, units should be cancelled,” suggests Sharma.

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