Applicability of NAV when you buy mutual funds
Investors always look anxiously at the 3 PM equity mutual fund cut-off timing for purchasing units of the scheme. Why? If you purchased units of a fund before this cut-off the same day Net Asset Value (NAV) of the fund purchased will be applicable. If you missed that cut-off timing and submitted your mutual fund application later than 3 PM, the next day?s NAV will be applicable for the purchase. This was for investments of up to Rs. 2 lakhs. Note that because of the corona virus pandemic, the cut-off timing for equity mutual funds was changed to 1 PM from 3 PM. Now, it?s back to 3 PM.
However, for investments of over Rs. 2 lakhs, the NAV of mutual funds as on the day on which the funds reach the Asset Management Company (AMC) will be applicable.
The Securities Exchange Board of India (SEBI) has now changed all this. The circular from SEBI says ?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 utilization irrespective of the size and time of receipt of such application.?
Let?s consider an example to understand this. Let?s say you want to invest Rs. 3 lakhs in an equity mutual fund. You submit your application before 3 PM on Wednesday. If the amount you invested reaches the fund house on Thursday, the NAV of the fund as on Thursday will be applicable. Wednesday?s NAV will not be applicable.
Investors should note that SEBI has decided not to change the existing NAV provisions that?s applicable for liquid and overnight mutual funds and the cut-off timings haven’t been changed.
When will the changes be applicable?
SEBI has said that all the new guidelines on NAV of mutual funds applicability will be with effect from January 1, 2021.
Now, let us look at each of the fund categories to understand how NAV changes will work.
Equity funds
Now, for investments of up to Rs. 2 lakhs made before the cut-off timing, the same day NAV is applicable and for investments made after 3 PM, next day?s NAV is applicable. For investments of more than Rs. 2 lakhs, NAV as on the date on which funds are realized by AMC will be applicable.
From January 1, the NAV of the equity fund as on the date of realization of funds for the AMC will apply. This is for all investments made in equity funds, irrespective of the value invested.
Debt funds
For investments of up to Rs. 2 lakhs made before the cut-off timing, the same day NAV is applicable and for investments made after 1 PM, next day?s NAV is applicable. For investments of more than Rs. 2 lakhs, NAV as on the date on which funds are realized by AMC will be applicable.
From January 1, the NAV of the scheme as on the date of realization of funds for the AMC will apply. This is for all investments made in debt funds, irrespective of the value invested.
Liquid and overnight funds
At present, the cut-off timing for this category of mutual funds is 12:30 PM. The investor will be provided with the NAV of mutual funds as on the date on which the funds are realized by the AMC. There has been no change in this.
How will this affect investors?
Only those investors that use modes of payments such as cheques will be affected by this change. This is because they lock in the NAV on a date and pay later for the investment (for investments of up to Rs. 2 lakhs). This won?t be available for them once the new rules come into effect. Investors will need to switch to digital payments to get the NAV that they need.
There is still no clarity on the cut-off time applicable for the realisation of funds. If the cut-off time for the realisation of funds will be 1 PM, then it might be a problem for those investors who submit their applications close to the cut-off time. This is for those who invest directly. If you are using a demat account and settle payments by bank transfers, you need to be mindful of the cut-off timing.
What about SIP (Systematic Investment Plan) investments?
For SIPs, as you might know, funds are paid to the fund houses using ECS, NACH mandate, EFT and NEFT. The NAV of mutual funds applicable for the purchase will usually be as that on the SIP date. However, the bank has to initiate the transfer before the cut-off timing. There might be times when the funds are transferred after the cut-off timing. Then, the next day’s NAV might be applicable.
