I'm applying to a liquid fund to buy units; what day's NAV will I get?
Markets have plummeted today; how can I invest at today's NAV?
Context
On any given day, a number of investors put money into a scheme. A mutual fund collects money, invests it in its existing portfolio, and distributes units to investors based on the applicable NAV. As simple as it may appear, there is a serious problem: what should be the applicable NAV?
To what day's NAV should the units be assigned?
Should the NAV be assigned based on the date of application or the date of money receipt?
Should it be the one calculated before the receipt of application/money or the one calculated after?
It is not possible to process all applications received on any given day on the same day. Should there be a time limit for this, so that applications received after that deadline are treated as received the following business day?
To ensure consistency in the operations of all mutual funds, SEBI has enacted certain regulations relating to the application of net asset values at the time of purchase and redemption.
These are referred to as the "Uniform Cut Off Timings for the Applicability of Net Asset Value of Mutual Fund Schemes/Plans."
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Rationale
As an investor, you may have submitted an application form today, but your money may not be realised by the mutual fund right away. If payment is made by
a check, it would be available only after clearing.
net banking, the funds will be transferred from your bank account to mutual fund accounts either immediately or with a small time lag depending on the arrangements made with the third party known as the payment gateway.
This means that your contribution to the pool of funds will not be available until the mutual fund receives the money accompanying the application.
Assigning units at a specific NAV indicates that any future NAV will include your share of the portfolio's profits/losses. This essentially means that any investor should be assigned units only after his or her money is ready to be invested or added to the existing portfolio. This shall help you in grasping the reasoning behind how regulations are created.
Definitions
The term 'cut-off Timing' refers to the outer limit of timing within a given day that is relevant for determining the NAV.
'International scheme' refers to a Mutual Fund scheme that has significant investments in foreign securities valued in time zones other than Indian Standard Time.
Application of these regulations
The Guidelines on Cut-off Timings for Mutual Fund Scheme Applicability shall apply to all Mutual Fund schemes and plans, with the exception of international schemes and transactions in Mutual Fund units conducted on a recognised Stock Exchange.
Cut-off Timings
Purchase
liquid fund schemes and plans
The following NAV shall be applicable
If the application and funds for utilisation are received for utilisation1 up to 1.30 p.m. on a day 2 - the closing NAV of the day preceding the day of application receipt;
If you apply to buy liquid funds today, August 1, 2022, at 10 a.m., and your funds are transferred to the mutual funds account for use before 1.30 p.m., you will be granted units at the NAV of yesterday, July 31, 2022. Even though yesterday was a Sunday, the overnight and liquid fund NAVs are calculated every day, not just on working days, as you may have read in the previous post.
if the application is received after 1.30 p.m. on a day and funds are available for use that day - the closing NAV of the day preceding the next business day; and
If you apply to buy liquid funds today, August 1, 2022, at 2 p.m., and your funds are transferred to the mutual funds account for use today, you will be granted units at the NAV that shall be calculated and disclosed tonight.
Where the funds are not available for utilisation before the cut-off time - the closing NAV of the day immediately preceding the day on which the funds are available for utilisation - regardless of the time of receipt of the application.
If you apply today, August 1, 2022, at 10 a.m., to buy a mutual fund with a bank check, you will be given units only when the check clears and payment is received by the mutual fund. If the funds arrive in the mutual fund account on Tuesday evening, they will be available for use only on Wednesday. The applicable NAV in this case shall be of Tuesday.
But, what if the AMC takes too long to cash the payment instrument that I attached to the application form when purchasing a mutual fund?
Mutual Funds shall use the appropriate banking facility to ensure that each payment instrument for subscription or purchase of units is deposited in a bank as soon as possible. AMCs must compensate any investor, scheme, or plan that suffers a loss due to delay on their part.
Please note: Fund being available for utilisation is not the same as funds received in the account.
without availing any credit facility, whether intra-day or otherwise