Mutual Fund Cut-Off Time and Net Asset Value (NAV)

Introduction

In recent data by the Indian Mutual Fund Industry, at the end of August 2021, the Assets Under Management (AUM) value in the mutual funds industry in India stood at ₹36.6 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 is Mutual Fund Net Asset Value?

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.

What is Mutual Fund Cut-off Time?

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 comprised 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 3:00 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 3:00 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.

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

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.

The Bottom Line

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.