SEBI Proposes Extension of NAV Calculation Time for Overnight Mutual Fund Redemptions

The market regulator has put forward a proposal to extend the cut-off timing for determining the applicable net asset value (NAV) for the redemption of units in mutual fund overnight schemes (MFOS) from the current 3 PM to 7 PM.

This recommendation aligns with the regulator's directive requiring stock brokers and clearing members to upstream client funds to clearing corporations at the end of each trading day. These funds must be transferred in the form of cash, a lien on Fixed Deposit Receipts (FDRs) created from client funds, or a pledge of MFOS units acquired using client funds.

According to a consultation paper released by the Securities and Exchange Board of India (SEBI) on January 20, MFOS serve as a new investment avenue for stock brokers and clearing members to deploy client funds. The paper highlights that investing in MFOS ensures minimal risk transformation, as client funds—withdrawable on demand—are allocated to overnight tenure securities and exclusively exposed to risk-free government securities. 

Additionally, stock brokers and clearing members must ensure that client funds are invested only in MFOS schemes that allocate funds to risk-free government bond overnight repo markets and overnight Tri-party Repo Dealing and Settlement (TREPS).

To implement this change, a working group comprising industry participants, the Association of Mutual Funds in India (AMFI), and members of the Mutual Funds Advisory Committee (MFAC) has recommended shifting the cut-off timing for redemption requests in overnight fund schemes from 3 PM to 7 PM.

The proposed adjustment aims to provide stock brokers and clearing members with sufficient time to unpledge MFOS units and submit redemption requests to mutual funds after market hours.

Since overnight schemes invest in securities maturing the next working day, they do not require any pre-market-hour sale transactions to meet redemption requests. Instead, based on the redemption requests received on a given trading day (T-day), the schemes can choose not to reinvest the maturity proceeds scheduled for the T+1 settlement date.

This process ensures that funds received on T+1 are used for payouts rather than reinvestment. Consequently, whether the redemption cut-off timing remains at 3 PM or is extended to 7 PM, it does not impact fund valuation or redemption capability.