Capital market regulator, SEBI has partially modified rules on applicability of Net Asset Value (NAV) in case of purchase of mutual fund units (excluding liquid and overnight schemes).

With effect from January 01, 2021, investors in equity and debt funds will be allotted mutual fund units based on the closing NAV of the day on which the asset management company (AMC) receives the fund. This will be done irrespective of the size and time of receipt of such application.

The cut-off time remains unchanged at 1 pm.

At present, investors get the closing NAV of the same day as the day of application provided the application is submitted before the cut-off time of 1:00 pm for an investment of up to Rs 2 lakh in equity and/or debt funds. However, if the transaction takes place after the cut-off time, investors get the next day’s NAV. In case the investment amount exceeds Rs 2 lakh, investors are allotted units based on the closing NAV of the day when the amount reaches the mutual fund house.

With effect from January 01, 2021, even if the investment amount is below Rs 2 lakh investors will get the NAV of the day when the amount is available to the AMCs for utilization.

For investment in liquid and overnight funds there is no change in rules as it is already applicable to these funds i.e. investors get the NAV of the day when the amount is received by the AMC. The cut-off time for these funds is 12:30 pm.

How will it impact mutual fund investors?

The new rule is likely to impact cheque-based transactions. At present, units are allotted if the investor hands over the cheque before the cut-off time. But the cheque may get cleared only after a couple of days. This means that the investor starts participating in the growth of the fund even though the amount has not yet been deployed. The new rule will pave way to uniformity for all investors by ensuring that the investor starts earning only when the amount is actually deployed in the fund.

However, the move could also impact auto-debit transactions such as SIP and other online transactions if for any reason the payment does not go through by the cut-off time.

Apart from the above-mentioned policy relating to uniformity in applicability of NAV, SEBI has asked mutual funds to put in place a written down policy which inter-alia detail the specific activities, role and responsibilities of various teams engaged in fund management, dealing, compliance, risk management, back-office, etc., with regard to order placement, execution of order, trade allocation amongst various schemes and other related matters.

The policy, which will come into force from January 01, 2020, will ensure that all the schemes and its investors are treated in a fair and equitable manner.

The policy has to be approved by the AMC Board and the trustees and will have to ensure compliance with the following:

1) For orders pertaining to equity and equity related instruments:

AMCs will use Order Management System (OMS) for placing orders for equity and equity related instruments for each scheme. Where a fund manager is managing more than one scheme, he/she will have to mandatorily place scheme-wise order. The OMS will ensure that the orders do not breach the limits as specified in the Scheme Information Document (SID). Any change in limits specified in OMS will be subject to the approval of Compliance and Risk Officer.

All orders of fund manager(s) will be received by dedicated dealer(s) responsible for order placement and execution. The AMC may also put in place a policy wherein prior approval of Compliance or Risk Officer would be required through OMS before the order is received by the dealer.

2) Requirements with respect to investments in all instruments:

AMCs have to ensure that the dealing desk is suitably staffed. All conversations of the dealer will be only allowed through the dedicated recorded telephone lines. Further, the internet facilities on computer and other devices inside the dealing room will be restricted for activities related to trade execution.

Dealers can place order for each scheme individually or pool it on the basis of orders from multiple schemes. In case of pooled orders, post allocation of trades will be done on a pro-rata basis as per the size of the order placed. The said allocation will be based on weighted average price. The policy has to clearly include scenarios / situations (e.g. redemption pressure) in which deviation from the allotment of units on pro-rata basis would be permissible.

If mutual funds are required to place certain margins / collaterals in order to execute certain transactions, the policy will include details on how such margins / collaterals shall be segregated / placed from amongst various schemes, without affecting the interest of investors of any scheme.

3) Monitoring of Compliance:

AMCs will have to maintain a system based monitoring mechanism to ensure compliance with the requirements as stated in the aforementioned points. The system will have in place audit trail of activities related to order placement, trade execution and allocation. Further, there would be time stamping with respect to order placed by fund manager, order placed by dealer, order execution and trade allocation. Any non-compliance and all material information in this regard will be reported to trustees on quarterly basis. Trustees will have to inform the same to SEBI in their half yearly trustee report.

This article first appeared on PersonalFN here