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Investors today are becoming more financially prudent, and the popularity of mutual funds is only rising. Mutual Funds offer attractive returns and reduced risk since they are managed by a fund manager and are a collection of a variation of securities. This provides a hedge from a loss in any one security or industry-specific loss.However, there are regulations around when transactions related to mutual funds can take place, just like the timings of the stock market. This helps control the sudden impact of large transactions and allows fund managers ample time to complete other analyses. It also gives the mutual fund a benchmark of the NAV against which transactions are processed on a daily basis.
What are the cut-off timings for mutual funds?
As per the Security and Exchange Board of India’s (SEBI) circular, dated 17/09/2020, mutual funds will be allotted at the NAV (Net Asset Value) applicable on the day of the realisation of funds.The realisation of funds here simply refers to whether your fund house has received the funds or not. Hence, the NAV applicable to your transaction will depend on this.While this was expected to be implemented from the 1st of January 2021, a circular dated 30/12/2020 announced that this implementation was being pushed back by a month, making it now applicable from the 1st of February 2021.
Cut-off timings and NAV applicability
- Liquid or Overnight Funds: Overnight funds are those mutual funds that have a maturity of 1 day. This protects the investors from liquidity risks. Liquid funds are those mutual funds that have a maturity of up to 91 days. There is a cut-off timing of 1:30 PM for Subscriptions, whereas there is a cut-off timing of 3:00 PM for the Redemption of liquid or overnight mutual funds.
- All schemes other than Liquid or Overnight Funds: There is a cut-off timing of 3:00 PM for both Subscription and Redemption of any fund that is not a liquid or overnight mutual fund.
Also Read : Different Types of Mutual Fund Charges
To which transactions are the realisation of funds applicable?
- All purchase transactions: Irrespective of the amount of investment, if it is an initial purchase of additional purchase of units, or if it’s a lump-sum investment or under Systematic Investment Plan (SIP)
- Purchase of units through the inter-scheme switching of investments, including switch transactions under the Systematic Transfer Plan (STP) or trigger events irrespective of the amount of investment.
How is the applicable NAV calculated?
For all purchase transactions, including Switch-in transactions, under all mutual fund schemes, irrespective of investment amounts (except Liquid Funds and Overnight Funds), the applicable NAV should be determined as follows:
- When the purchase transaction is received before the cut-off time of 3:00 PM on a business day, at the official point(s) of acceptance and the funds for availing the entire purchase of the subscription or service are available for utilisation before the cut-off time on the same business day- NAV of the same business day will be applicable.
- When the purchase transaction is received before the cut-off time of 3:00 PM on a business day, at the official point(s) of acceptance, but the funds available for the entire purchase of the subscription/service are available after the cut-off time of 3:00 PM on the same business day- NAV of the following business day on which the funds are available for use prior to the 3:00 PM will be applicable.
- When the purchase transaction is received AFTER the cut-off time of 3:00 PM on a business day, at the official point(s) of acceptance and the funds for availing the entire purchase of the subscription or service are available for utilisation upto 3:00 PM on the same business day- NAV of the following Business Day will be applicable.
- When the application for the purchase of a subscription is received after the cut-off time of that business day at the official point(s) of acceptance and the funds for availing the entire purchase of the subscription or service are available for utilisation after the cut-off on the same or subsequent business day- NAV of following business day on which fund realised prior to 3:00 PM will be applicable.
NOTE: In case of SIP transactions, in which the investor has signed up for a monthly payment of a specified amount on a certain date every month, assuming that the specified date is a business day, the investor will be allotted the SIP units on the specified date only if the money is received/credited to the Mutual Fund’s bank account before the cut-off (3:00 PM). Otherwise, SIP units will be allotted at the NAV of the subsequent business day on which the funds are received before the cut-off time.
How will the NAV be determined if the Mutual Fund’s account receives the subscription amount first and then the application is received?
In such cases, the date and time stamped on the application/transaction will be considered for determining NAV. If it falls before the cut-off of that specific business day, then the NAV of that specific business day will be applied. If it exceeds the cut-off, the NAV of the subsequent business day will be levied.
Is there a change in cut-off timings for purchase transactions?
No, there have been no changes announced by the Security and Exchange Board of India (SEBI) regarding the existing cut-off timings of purchase transactions.
Does the new change of rules apply to all modes of transactions?
Yes, the new rule on Applicable NAV applies uniformly to all modes of transactions. Allotment of units will depend on the realisation of subscription money henceforth, irrespective of the mode of the transaction (physical or online transaction through any exchange platform/online channel partner).
What will the Applicable NAV be on units allotted on reinvestment of dividends?
The allotment of units upon reinvestment of the dividend will be at ex-dividend NAV.
How will this rule change affect NFO purchases and NFO Switch-In transactions?
NFO is an acronym for mutual fund jargon New Fund Offering. It refers to the first subscription of a new mutual fund. Switch transactions refer to moving funds from one mutual fund to the other.The units will be allotted after taking into consideration all the valid applications that were submitted before the cut-off time of a specific business day on the NFO closure date, provided the funds are realised (transferred to the bank account of the Mutual Fund) prior to the cut-off of that business day, in case of NFO subscriptions.When dealing with Switch transactions from an existing scheme into an NFO scheme , the NAV applicable will depend on the Switch-Out (redemption) requests received, processed and time stamped before the cut-off timing pertaining to the source schemes. The units in the NFO scheme will then be allotted on the allotment date. The NFO units are allotted at the face value of the units.
FAQS - FREQUENTLY ASKED QUESTIONS
Which bank account received the fund upon redemption ?
The bank account linked to the mutual fund will receive the funds upon redemption. It is most often the bank account through which the funds were transferred to the mutual funds. Investors must be careful and always take note of which bank account has been linked to their long-term investments in mutual funds.
What happens if an order for subscription or redemption is placed after the cut-off timings ?
In case a request for subscription or redemption is placed after the cut-off timings, the transaction will be processed on the following business day. The NAV will also be determined accordingly.
How often can someone withdraw from mutual funds ?
While withdrawing funds, an exit load might apply, which will reduce the returns. Therefore, withdrawing frequently may not be wise. However, mutual funds in the lock-in period may carry heavy charges if the investor redeems them before the end of the lock-in period. Mutual funds offered as collateral cannot be redeemed unless the lien is removed from them.
Can someone use UPI to make payments for mutual funds ?
Yes, UPI, debit cards, net banking, NEFT, and RTGS can be used to make investments in mutual funds. Credit cards cannot be used to make any form of investment. The settlement for most happens on the same day, but NEFT or RTGS may take longer to reflect in the mutual fund, especially for a lumpsum payment.
What happens if some installments of a SIP (Systematic Investment Plan) are missed ?
Mutual funds can’t charge any penalty if a single SIP is missed. However, if there are inadequate funds because of which the SIP installment was missed, the bank will charge a penalty for not having enough funds when an auto-debit function was set up. If three consecutive installments of a SIP are missed, the mutual fund will cancel the SIP, and this will hamper the investment plan. However, the investments made will continue to draw returns. An investor can also restart the SIP again at a later point.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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