Mutual Fund Cut Off Time

Introduction

In recent data by the Indian Mutual Fund Industry, at the end of June 2024, the Assets Under Management (AUM) value in the mutual funds industry in India stood at ₹61,15,582 crores. At the surface, this might not seem like anything big, but it reinforces the fact that people are beginning to show interest in mutual funds; they are finally beginning to see the value in it.

To have been popularized at such a mass scale (thanks to the advertisement industry) in such a short time, mutual funds still remain an elusive topic for a common man's comprehension. Understanding how they work and the foundational technicalities at play when investing in a mutual fund lies at the core of deriving true benefits from it.

Let's begin by understanding what mutual fund Net Asset Value (NAV) is, before discussing cut-off time.

What are Cut-Off Timings in Mutual Funds?

Mutual funds are a financial vehicle where people invest their money in order to generate profit. Mutual funds are also subject to the ups and downs of the market, much like shares or stocks - because mutual funds are composed of shares and stocks and all sorts of other securities. At the end of each trading day, the NAV of a mutual fund is announced; this may be lesser than the previous day's value, or greater by a significant quantum.

Now, if investors wish to invest in a mutual fund, they must do so sometime before the trading day closes and the NAV is announced. For all the purchase transactions, the cut-off time on any trading day is 2:30 p.m. If you wish to invest in a fund at the current NAV, you must submit your application to AMCs or RTAs (Asset Management Companies or Registrar and Transfer Agents) before the clock strikes 2:30 p.m.

Even if you do submit your application to AMCs or RTAs a little later, your application will get accepted anyway, but you won't be able to avail the current NAV; your investment will have been done on the NAV announced at the end of the trading day. This is why cut-off times are so significant for investors.
 

What is NAV in Mutual Funds?

A mutual fund isn't comprised of a single type of shares or stocks - is a pool of funds used to buy market securities of all kinds from different companies. It is difficult to measure its value in the same terms as shares or stocks. As such, a term called Net Asset Value is used to measure how high or low a value a mutual fund has.

Net Asset Value, or NAV for short, is calculated by dividing the total value of securities (and cash, if present) in a mutual fund less the liabilities, by the total number of shares outstanding. This derives a number that is the per-share value of a mutual fund.

There is a marked difference in how the value of NAV fluctuates as compared to the value of stock and share prices. While the latter are subject to fluctuation almost every hour of the day, mutual funds actually update at the end of a trading day - and that becomes their NAV.

For example, if you wish to purchase mutual funds XYZ worth $50,000, and the NAV at the end of trading day was $500, then you would end up with 100 shares in XYZ mutual funds.

In fact, this is where the entire concept of cut-off time begins. Let's discuss that now.

Mutual Fund Cut-Off Time in India

The cut-off period is no longer as important under SEBI's new NAV regulations. The mutual fund firms will only distribute units starting on February 1, 2021, following the realization of money. Therefore, even if you submit your application before the deadline, it won't be processed until the funds are really realized. As a result, the NAV that will apply to your transaction will depend on when the fund house gets your cash.

The following table represents the same:
 

SEBI New Rule for Mutual Fund Cut Off

In India, there used to be several cut-off times in practice for mutual funds, based on the nature of schemes:

Scheme                        Cut-off time
Redemption                    3:00 p.m.
Overnight Funds             1:30 p.m.
Liquid Funds                   1:30 p.m.
All other types of funds   3:00 p.m
 

However, this rule has changed now. The SEBI has announced new rules for NAV and cut-off times for mutual funds, effective from 1st February 2021. According to the new rules and regulations, the NAV of a purchased unit of mutual funds will depend on the realization of the funds. This has completely tossed the cut-off time system out the window. It basically means that the NAV applicable to your purchased mutual funds would be the NAV that is present in the bank account of the mutual fund agency that you are purchasing from before the transaction is complete.

This rule is applicable to all mutual fund schemes, barring liquid and overnight funds. The new rule also applies to Systematic Investment Plans (SIPs) and lump-sum investments.

According to SEBI circular no. SEBI/HO/IMD/DF2/CIR/P/2020/175 dated September 17, 2020, read with circular no. SEBI/HO/IMD/DF2/CIR/P/2020/253 dated December 31, 2020, effective from February 1, 2021, the applicable NAV in respect of purchase of units of mutual fund scheme shall be subject to realization & availability of funds in the mutual fund's bank account before the applicable cut off timings for purchase transactions, regardless of the (The preceding regulation already applies to purchase transactions in Liquid Funds and Overnight Funds.)
Under the SEBI Mutual Fund rules, all schemes must adhere to a cut-off schedule in order to report their NAVs based on the transaction type.
 

Why is Mutual Fund Cut Off So Important?

The SEBI Mutual Fund Regulations state that fund companies must announce the NAVs of all mutual fund schemes following the end of the markets. Simply put, they announce the NAV at the conclusion of the trading day. Because of this, investors place a lot of importance on the deadline for submissions. You must invest before the cut-off time in order to receive the end-of-day NAV for a certain business day.

The majority of mutual fund schemes have a 3 PM buy transaction deadline. Liquid fund schemes, however, are not subject to this scheduling. This indicates that if you invest up to 3:00 PM, you will receive the day's NAV.

If you submit your application after the deadline, the mutual fund firm will still accept it. But in these situations, you will receive the NAV for the following working day. The cut-off time guidelines also apply to redemptions.

All mutual funds must adhere to the cutoff period under SEBI Mutual Fund Regulations. Plans utilizing liquid fund do not fall under this. The guidelines state that future NAV is used to determine how mutual fund units are distributed. The closing market value of the securities owned in each scheme is used to calculate the NAV. Then, at the end of the day, it is declared.
 

NAV Based on Realization of Funds

The guidelines for allocating units of mutual funds have been updated by SEBI. The realization of funds serves as the foundation for the new NAV regulation. Beginning on February 1, 2021, it will be applied to all purchasing transactions.

Which transactions are affected by the nav based on funds realization?

● All buy transactions, regardless of the amount of investment, whether first or extra unit acquisition; lump-sum investment or Systematic Investment Plan (SIP).
● Purchase of units via inter-scheme switching of investments, including switch transactions under the Systematic Transfer Plan (STP) or trigger events, regardless of investment amount

Applicable NAV for Mutual Funds Transactions

All purchase transactions other than those for liquid and overnight funds are included in the applicable NAV for mutual fund transactions. Additionally, it covers all mutual fund scheme transactions, including Switch-In transactions. Regardless of the size of the investment, the NAV is subject to the following rules:

Which NAV is applicable on switching mutual funds?

By filing an application, an investor might choose to swap their investments across investment schemes. The earliest day is when it can be processed. You may comprehend that both the "Switch out" and "Switch in" schemes will have this as their business day. Applications for "switch in" are handled the same as applications for purchases. The applicable NAV for these will be determined by the acquisition deadline. Applications for "Switch out" will be considered the same as applications for redemption. Based on the deadline for redemption, the Applicable NAV for them will be determined.

The mutual fund cut-off time worked like shares and stocks - purchasing when the prices are low. With the new SEBI circular, this concept has now ended, and the NAV now completely depends on the fund's realization of the mutual funds' outfit you are investing with. Whatever the case, mutual funds are a great investment option for the long haul and a secure future.