Market fluctuations drive mutual fund investments. Although you can buy and sell mutual fund units throughout the day during office hours, there is a cut-off time during the day that determines which day’s NAV will be applicable to your transaction.

Net Asset Value (NAV) – The NAV represents the per share/unit price of the mutual fund on a specific date or time. It is the market value of all securities held by the mutual fund scheme. The NAV, in simple terms, is the price you pay for the units of the mutual fund scheme.

Here is the formula to obtain the NAV of a fund:

NAV = (Total Assets – Total Liabilities)/Total Number of Outstanding Units.

Total assets are the value of all the securities in the portfolio, and Total liabilities are the value of overall liabilities like fund expenses (such as staff salaries, management expenses, operational expenses, audit fees, etc.); mutual funds are required to calculate their NAV at least once every business day.

Cut-off time – For subscriptions and redemptions of mutual fund units, there is a set cut-off time. When you buy or sell units of your mutual fund scheme, the Net Asset Value (NAV) you receive is determined by the cut-off time. Simply put, the time you submit your application to the fund house will determine the allocation of NAV. This time is known as the cut-off time in the world of mutual funds. Distinct mutual fund categories, including liquid, debt, and equity funds, have different cut-off times. Depending on when you submit your application, you may receive the NAV for that day or the day after.

Investors have to submit applications at the offices of Asset Management Companies (AMCs) or their Registrar and Transfer Agents (RTAs). You have to ensure the application was submitted before the cut-off time. Only then you could redeem at a high market or purchase at a low market. By submitting the application before the cut-off time, you could get the same day NAV (Net Asset Value). A day’s difference doesn’t matter for long-term investors, but the cut-off timing matters if you want to gain from swift and abrupt market movements.

However, online mutual fund distribution portals have advanced cut-off times to process transactions before the mutual fund’s cut-off time. Fintech has made buying and selling mutual funds easier than ever before, thanks to various digital portals and investing applications.

Cut-off timings for mutual fund transactions:

(For determining applicable Net Asset Value (NAV) for subscription and redemption transactions)

Type of Schemes Cut-off timings
(including Switch-in from other schemes)
Subscription Redemption
Liquid Funds & Overnight Funds 1:30 PM 3:00 PM
All other schemes (other than Liquid Funds / Overnight Funds) 3:00 PM 3:00 PM

(Source: AMFI) 

As per SEBI circular no. SEBI/HO/IMD/DF2/CIR/P/2020/175 dated September 17, 2020, read circular no. SEBI/HO/IMD/DF2/CIR/P/2020/253 dated December 31, 2020, effective from February 1, 2021. The applicable NAV in respect of the purchase of units of a mutual fund scheme shall be subject to realisation & availability of the funds in the bank account of a mutual fund before the applicable cut-off timings for purchase transactions, irrespective of the amount of investment, and under all mutual fund schemes. (The above rule is already applicable for purchase transactions under Liquid and Overnight Funds).

In simple words, as per new NAV rules by the SEBI, the cut-off time is now less relevant. From February 01, 2021, the mutual fund houses will only allot units after the realisation of funds. So, even if you submit the application before the cut-off time, the allotment will be upon the realisation of funds, which means the NAV applicable on your transaction will depend on when the fund house receives your money.

Which type of transactions are covered under this new rule by SEBI?

The rule is applicable to all investments, irrespective of the amount of investment. It covers all mutual fund schemes except Liquid and Overnight Funds.

  • All purchase transactions – whether Initial purchase or additional purchase of units; whether a lump-sum investment or under Systematic Investment Plan (SIP), irrespective of the amount of investment.
  • Purchase units through Inter-scheme switching of investments, including switch transactions under Systematic Transfer Plan (STP) or trigger events irrespective of the investment amount.
Time of receipt of MF Application and Money Applicable NAV
Where the purchase transaction is received up to the cut-off time of 3.00 p.m. on a business day at the official point(s) of acceptance and funds for the entire amount of subscription/purchase are available for utilisation up to 3.00 p.m. on the same Business Day. NAV of the same Business Day
Application is received up to the cut-off time of 3.00 p.m, but the funds are available for utilisation after 3.00 p.m. on that Business Day or a subsequent Business Day NAV of the subsequent Business Day
Application is received after the cut-off time of 3.00 p.m., and the funds are realised up to 3.00 p.m. on the same Business Day. NAV of subsequent Business Day
Application is received after the cut-off time of 3.00 p.m., and funds are realised after 3.00 p.m. on the same Business Day or subsequent Business Day. NAV of subsequent Business Day on which fund realised prior to 3.00 p.m.

(Source: AMFI) 

Therefore, in order to receive the NAV of the same day at a market low, even if you submit an application to buy units of a specific MF scheme before the cut-off time, you must ensure that even the funds are realised in the bank account of the fund house before the cut-off time on the same business day.

It’s almost certain that you won’t get same day NAV in case the payment is made through cheque for the purchase of MF units. Even if you make an electronic payment, ensure to do it well before the cut-off time so that the money gets transferred to the fund account before the cut-off time to get the same day NAV. However, in case you are investing through an online platform, the fate of your mutual fund investment will depend on the transaction rules of that exchange/platform.

This article first appeared on PersonalFN here

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