Mutual Funds

SEBI Revises Mutual Fund Cut-Off Time

In the first wave of the COVID-19 pandemic, Securities and Exchange Board of India (SEBI)  had reduced the cut-off timings for subscription of all mutual funds to 1 pm from 3 pm and for liquid and overnight schemes to 12.30 pm from 1:30 pm to avail the same day’s NAV (Net Asset Value).The newly trimmed cut-off timings were a result of shorter trading hours for debt and currency markets because of logistical hurdles in the nationwide lockdown. This was initially agreed for the first lockdown period, but there were extensions. On October 19,2020, of mutual fund schemes to 3.00 p.m.

What do mutual fund cut-off timings mean?

Cut-off timings determine the NAV (the price of one unit of a mutual fund scheme) you are entitled to get when you purchase or redeem units of a mutual fund scheme. The time at which you make the request plays a role in which NAV you would get: Same day value, previous day value, or the next day value.  There are two cut-off timings — one for the liquid/overnight funds and one for the equity/hybrid/debt funds.

Cut-off timings for mutual fund transactions

New rule on applicable NAV effective from 1st February, 2021. For determining applicable Net Asset Value (NAV) for subscription and redemption transactions:

Type of SchemesTransaction typeCut-off timings
Liquid Funds &
Overnight Funds
Subscription (including Switch-in from other schemes)1:30 p.m.
Redemption (including Switch-in from other schemes)3:00 p.m.
All other schemes
(other than Liquid Funds
/ Overnight Funds)
Subscription (including Switch-in from other schemes)3:00 p.m.
Redemption (including Switch-in from other schemes)3:00 p.m.
Source: AMFI India

How is the applicable NAV determined?

The Applicable NAV for purchase transactions (including Switch-In transactions) under all mutual fund schemes (other than Liquid funds and Overnight Funds) irrespective of the amount of investment, shall be determined as follows:

Time of receipt of Transaction and MoneyApplicable NAV
Where the purchase transaction is received upto 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 utilization upto 3.00 p.m. on the same Business Day.NAV of the same Business Day shall be applicable
Where the transaction is received upto cut-off time of 3.00 p.m. on a business day at the official point(s) of acceptance, but the funds for purchase of units are available for utilization after 3.00 p.m. on that Business Day or on a subsequent Business DayNAV of the subsequent Business Day on which the funds are available for utilization prior to 3.00 p.m. shall be applicable.
Where the transaction is received AFTER 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 utilization upto 3.00 p.m. on the same Business Day.NAV of subsequent Business Day shall be applicable.
Where the application is received after 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 utilization after 3.00 p.m. on the same Business Day or subsequent Business Day.NAV of subsequent Business Day on which fund realized prior to 3.00 p.m. shall be applicable
Source: AMFI India

Illustrations:

  1. Lump Sum purchase transaction( Say, ₹50,000 received (time stamped) before cut-off time of 3.00 p.m. on Monday 28-Jun-2021 )

If the funds are received in the mutual fund’s account before cut-off time of 3.00 p.m. on 28th June, 2021, the investor will be allotted closing NAV of 28-Jun-2021. However, if the funds are received in the mutual fund’s bank account at say 5.00 p.m. on 28th June, 2021, i.e., after the cut-off time of 3.00 p.m., the allotment of units will be done at the NAV of Tuesday 29-Jun-2021. However, if the funds are received in the mutual fund’s bank account at say 4.00 p.m. on Friday 2-Jul-2021, the units will be allotted at the closing NAV of Monday 5-Jul-2021 (June 3 & 4 being Saturday & Sunday i.e., non-business days).

[ Mutual Funds V/s Chit Funds ]

In short, the units are allotted at the NAV of the business day on which the funds are received into the mutual fund account before applicable cut-off time.

  • SIP Transaction

Assuming an investor has signed up for SIP transaction of, ₹5,000 to be debited on 10th of every month. Hitherto, the investor would have been allotted SIP units at the NAV for 10th the month (assuming the same is a Business day) irrespective of the date on which the money was received / credited to the Mutual Fund’s bank account. As per the new Rule, the investor would be allotted the SIP units at the NAV for 10th only if the money is received/credited to the Mutual Fund’s bank account before 3.00 p.m. on 10th. Else, the SIP units will be allotted units at the NAV of the next business day on which funds are received before the cut-off time.

In view of the above, investors are encouraged to avail electronic payment modes for remittance of funds to the mutual fund bank account to facilitate speedy fund transfers.

Why are mutual fund cut-off timings important?

Investors that trade in large volumes of money depend on even marginal per-unit gains. When it comes to long-term investors, cut-off timings do not play a very crucial role. Even in the case of individuals investing a small amount, cut-off timings do not majorly influence the profitability of the investment.

The precision in setting cut-off timing makes sense only if there is an infallible mechanism of capturing the time at which the sale and re-purchase applications are received. This is safeguarded through the time-stamping mechanism. Thus, considering cut-off timings makes it easier for investors to make informed decisions.

Tarrakki – Towards prosperity

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