A recent SEBI circular mandated 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 utilisation, irrespective of the size and time of receipt of such application”
This is to come into effect from 1st January 2021.
What does it mean exactly?
At present, if you submit an application to the mutual fund company on a working day (before the cut-off time), you will be allotted units the same evening, at that day’s NAV. Even though your cheque would take 2-3 days to clear and the mutual fund company will not actually receive your money till then. This is applicable only for investments up to Rs 2 lakhs.
The announced change means that irrespective of the amount, the mutual fund company will now only allot units on the day they have actually received the money, and on that day’s NAV.
Incidentally, for transactions through digital platforms, mutual fund companies were already enforcing this rule. The relaxation was only for investments via cheque and paper application forms.
Most investors should be prepared for their investments to happen 1-2 days after money moves out of their bank account.
One detail many retail investors don’t realise is that even when they use a payment gateway to invest, money does not move instantly. Depending on process cut-offs, it could take up to 2 working days for the money to move from your account to the AMC.
Our perspective on what this means for you
We believe that this is not of importance to consumers because the exact date of allotment of units has very little bearing on your outcomes over the long term. If you are doing a SIP, you don’t really know what the market condition would be on any given day in the future.
This is also part of the regulators’ intent to create a level playing field and should be welcomed by investors as a fair rule. Only once the AMC actually receives the money, can they deploy it into investments and start earning.
Previously, a cheque could take days to clear but the investor would start participating in fund growth from the day of application. This was, objectively speaking, unfair to existing investors in the fund.
All in all, this should have no impact on investors as this is more a procedural move rather than something that affects your investments in any way.