Mutual Fund Cut Off Time

In this article we explain what are mutual funds and what is mutual fund cut-off time, i.e., the time at which the net asset value (NAV) of a unit of a mutual fund scheme is determined for your purchase transaction.

 

What Are Mutual Funds?

 

An investment vehicle called a mutual fund allows multiple participants to pool their funds and earn returns on their initial investments over time. An investing expert known as a fund manager or portfolio manager oversees this group of funds. His or her responsibility is to invest the corpus in various securities, including bonds, equities, gold, and other assets, in an effort to generate the best possible returns. The investors split the investment’s gains (or losses) proportionate to their individual contributions to the fund.

 

 

Why Buy Mutual Funds?

 

The advantages of investing in mutual funds are numerous. Here are a few crucial ones:

 

• Professional Management Of Investments

 

Think of a scenario where you have to reach a place which is in a different state. The problem is that you aren’t a good driver. You now have two choices:

 

• • You can pick up driving.
  • You can travel on a plane/train/bus.

 

It is preferable to travel via plane/train/bus if you want to save time and if you want it to be a hassle-free journey. The same is true with investments.

 

Financial market investing requires a certain level of expertise. You must conduct market research and evaluate the best available options. You must be knowledgeable about things like the macroeconomic environment, specific industries, corporate finances, and asset classes. You’ll need to put a lot of effort and time into this. But investing in mutual funds can be a great alternative if you lack the knowledge or the time to research the market extensively. Here, a qualified fund manager looks after your investments and works hard to deliver fair returns. The professional administration of your mutual fund investments requires you to pay specified fees, just as you would if you had purchased a ticket for traveling on a plane.

 

• Returns

 

One of the major advantages of mutual funds is the potential for larger returns than those offered by traditional investing options with guaranteed returns. This is so because mutual fund returns are correlated with stock market performance. Therefore, the value of your fund would be affected if the market is experiencing a bull run and performing exceptionally well. However, a weak market performance could have a bad effect on your investments. Mutual funds do not guarantee capital protection, in contrast to traditional investments. Do your homework and invest in funds that can assist you in achieving your financial objectives at the appropriate stage of your life.

 

• Diversification

 

Don’t put all your eggs in one basket, as the adage goes. This is a well-known maxim to keep in mind when making financial decisions. When you just invest in one asset, you run the risk of losing money if the market declines. By diversifying your portfolio and investing in a variety of asset classes, you can, however, avoid this issue.

 

You would need to carefully choose at least ten stocks from various industries if you were investing in stocks and required diversification. It may take a lot of time and effort to do this. But you immediately gain diversification when you invest in mutual funds. You could gain access up to 50 or even more equities from several sectors in a single fund, for example, if you buy in a mutual fund that tracks the Nifty 50. Your risk could be greatly diminished as a result.

 

• Tax Advantages

 

By participating in Equity Linked Savings Schemes, mutual fund investors can deduct up to Rs. 1.5 lakh in taxes (ELSS). The Income Tax Act’s Section 80C allows for the eligibility of this tax relief. Three years is the lock-in period for ELSS funds. As a result, you can only withdraw your money if you invest in ELSS funds after the lock-in period has passed.

 

Indexation benefits, which are available on debt funds, are another tax benefit. In the case of conventional products, all interest is taxable. Only the profits earned above inflation (as measured by the cost inflation index, or “CII”) are taxed in the case of debt mutual funds, though. Investors might benefit from increased post-tax returns as a result of this.

 

Now that we are clear about what mutual funds are , let us now understand what NAV is.

 

What Is NAV?

 

If you’re a new mutual fund investor, you might be curious to learn what NAV stands for. The unit cost of a mutual fund scheme is referred to as NAV – Net Asset Value. NAV is used as the basis for buying and selling mutual funds. The NAV is calculated each day based on the closing prices of all the securities that the various mutual fund schemes own after making the necessary adjustments, unlike share prices, which fluctuate frequently during trading hours. The expenses (sometimes referred to as TER) of a mutual fund scheme, such as fund management, administration, distribution, etc., are charged in proportion to the scheme’s assets and are adjusted in the NAV.

 

How Is NAV Determined?

 

Once you understand what NAV is, you must be interested in learning how it is determined. Through a new fund offering, a mutual fund company (AMC) solicits subscriptions for a new scheme (NFO). The units of a plan are priced at Rs 10 in an NFO. Let’s assume that the AMC raises Rs 1,000 crores from various investors during the NFO. The NFO subscribers’ fixed issue price of Rs 10 means that the AMC assigns units to investors according to the total amount raised. In this illustration, the NFO mobilised Rs 1,000 Crore, and the NAV was set at Rs 10. As a result, the AMC issues 100 Crore units and distributes them proportionally to investors depending on their individual investment amounts. As a result, if you contributed Rs 1 lakh to this NFO, you would receive 10,000 units.

 

Let’s break this down further. In accordance with the investment objective of the mutual fund, the Rs 1,000 crores raised in the NFO are invested in a variety of securities. These assets’ market values fluctuate every day. Let’s further assume that the scheme’s portfolio asset value increases the following day, rising from Rs 1,000 crore to Rs 1,020 crore. Let’s overlook scheme expenses for the time being to keep things simple. The NAV for the plan will be Rs 10.2. (Rs 1,020 Crores divided by 100 Crore units outstanding). Your original NFO investment of Rs. 1 lakh is now worth Rs. 102,000. (10,000 units x Rs 10.20 NAV).

 

Investors can purchase or sell units in an open-ended mutual fund scheme at any time using the day’s NAV. If there is no exit load, current investors can sell their units for the same price (exit load is a charge applied by the scheme for redemptions within a certain specified period). In other words, the price at which investors can purchase or sell units of a mutual fund scheme is what NAV stands for.

 

How Does NAV Affect Investors?

 

Is the NAV actually important? The number of units allocated for the investment amount is only determined by NAV. As an investor, you should be more concerned with the value of your investment than the number of units you possess. A scheme’s NAV’s appreciation is more significant than the NAV itself. In other words, return should be prioritized over NAV.

 

NAV’s Part In A Fund’s Performance

 

Because NFOs are issued at a NAV of Rs. 10, some investors believe that they are inexpensive. The value of the underlying securities and the total profits made since the start of the scheme are used to calculate the NAV of a mutual fund unit. Even though two different mutual fund schemes may have the exact same portfolio of securities and one may be offered at par value (NAV of Rs. 10) while the NAV of the other scheme may be more than Rs. 100, the intrinsic value of both of the schemes will be the same regardless of the difference in NAV.

 

Therefore, the NAV of a mutual fund scheme in isolation is a poor measure of that scheme’s performance. Before making an investment selection, an investor should constantly consider the scheme’s past performance and overall expense ratio, among other factors. The stock market’s swings influence mutual fund investments.

 

NAV Cut Off

 

Up until 2021 Jan, smaller investments were provided with same-day NAV if the applications were received before the cut-off time.

 

The following table lists the previous cutoff times for mutual fund transactions up to Rs. 2 lakh:

 

Type of Schemes	Cut-off timings
Liquid Funds	1:30 PM
Overnight Funds	1:30 PM
Redemption	3:00 PM
All other schemes	3:00 PM

 

SEBI’s New Mutual Fund Cut off Regulation

 

The modification to the cut-off time regime was published by SEBI in its circular numbered SEBI/HO/IMD/DF2/CIR/P/2020/175 dated September 17, 2020. In accordance with circular number SEBI/HO/IMD/DF2/CIR/P/2020/253 dated December 31, 2020, the changes to the cut-off time regime will take effect from February 1, 2021.

 

Pursuant to the change in law introduced by SEBI, the applicable NAV for a particular mutual fund purchase transaction will be the closing NAV of the concerned mutual fund on the day when your funds reach the bank account of the asset management company. Regardless of the size of the investment, the rule is applicable to all investments. With the exception of liquid funds and overnight funds, it includes all mutual fund schemes.

 

Why Is the Cut Off for Mutual Funds 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, all mutual funds announce the NAV at the conclusion of the trading day. Because of this, investors place a lot of importance on the cut-off time. You must invest before the cut-off time in order to receive the end-of-day NAV for a specific business day.

 

The majority of mutual fund schemes use to have a 3 p.m. cut-off time. Liquid fund schemes, however, are not and were not subject to this cut-off. So uptill Jan 2021, if you invest in a mutual fund up until 3:00 PM, you will receive the NAV at which the mutual fund opened. If you submitted your application after the deadline, the mutual fund company still use to accept it, but in those situations, you would have received the NAV for the following working day.

 

All mutual funds must adhere to the cutoff period under SEBI Mutual Fund Regulations. However, liquid and overnight mutual funds have a different cut-off regime. The SEBI regulations now state that closing NAV will be used to determine how many mutual fund units an investor will get. The closing market value of the securities owned in each scheme is used to calculate the closing NAV. At the end of the trading day, it is declared by the mutual fund.

 

Applicability Of New SEBI Regulations

 

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 rule. We summarize below the scope of its applicability.

 

• Since  February 1, 2021, the new cut-off regime introduced by SEBI came into effect.

 

• The following transactions are subject to the NAV computation based on realization of funds:

 

• • All purchase transactions—The rule is applicable to all purchases, whether they involve the original purchase of units or subsequent purchases of additional ones. It also applies to Systematic Investment Plan investments and lump sum investments (SIP). In contrast to before, the regulation does not apply to the size of the investment.

 

• • Purchase of Units through Inter-Scheme Switching of Investments: Regardless of the size of the investment, the rule also applies to switch transactions under the Systematic Transfer Plan (STP).

 

Did you know? You can now invest in mutual funds without paying any commission or brokerage on Kuvera:

 

Step 1: Download the Kuvera app, or visit our website.

 

Step 2: Create your account on Kuvera This will hardly take a few minutes. Once that’s completed,  select the ‘Invest’ option on ourhomepage, after which you can select ‘Mutual Funds’..

 

Step 3: Kindly go through the list of all zero-commission direct plans of mutual fund schemes to start investing.

 

Frequently Asked Questions:

 

• In how many days does my money is transferred to the asset management company?

 

It depends on the mutual fund house, typically, it reaches within 2 working days.

 

• Where can I check NAV of a particular mutual fund?

 

You can check NAV of any direct  mutual fund scheme on the Kuvera app.

 

Interested in how we think about the markets?

 

Read more: Zen And The Art Of Investing

 

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