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Best Practices for Investors to Ensure Timely NAV Allocation

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27 Aug 2024

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Introduction

Recently, mutual fund investors have experienced delays in allotting Net Asset Value (NAV), leading to widespread customer confusion and misinformation. These delays have understandably caused concern, as they affect the timely processing of investments and can impact the returns investors receive.

Considering these issues, explaining how the NAV allotment process works is essential. By clarifying the steps involved and the reasons behind potential delays, we aim to resolve misunderstandings and ensure you understand how your transactions are processed.

We seek to demystify the process and provide transparency to assist you in navigating uncertainty. This explanation will cover the calculation and allocation of NAV, the role of various entities involved, and the impact of specific timeframes on your investment transactions. By addressing these aspects comprehensively, we aim to enhance your confidence and ensure a more informed investment experience.

What is NAV?

NAV, also known as Net Asset Value, represents the value of a single mutual fund share. It is calculated by deducting the fund's total liabilities from its assets and dividing the sum by the total number of outstanding shares. (SEBI) The Securities and Exchange Board of India recommends using mutual funds to update their NAVs by nine o'clock daily.

How is NAV Allocated?

As per a SEBI circular issued on September 17, 2020, mutual fund units are allocated according to the NAV (Net Asset Value) applicable when the fund house realises the funds. This means that the NAV you receive for your investment is determined by whether the mutual fund has received your payment by a certain time.

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The concept of "realisation of funds" is central to this process. It refers to the point at which the mutual fund house has confirmed receipt of your investment money. If the fund house receives the funds within the prescribed cut-off time on a given day, the NAV of that day will apply to your transaction. However, if the funds are received after the cut-off time, the NAV applicable will be for the next business day.

This policy was implemented in February 2021 to provide a fair and standardized approach for NAV allocation across the industry. The industry has established specific cut-off times for different mutual fund schemes to facilitate smooth transaction processing and ensure that all investors are treated equitably. These cut-off times are uniformly applied to ensure consistency and transparency, preventing discrepancies and ensuring that you, as investors, clearly understand when your transactions will be processed, and the corresponding NAV used.

Important Notes:

Orders which are placed on a public holiday or during the weekend will be fulfilled the next working day.
If you place an order before the cut-off time but the cut-off does not receive the funds, your order will be processed on the next business day, and you will receive the NAV for that day.

Process After Placing a Mutual Fund Order

1. Order Placement: When you place an order, it is promptly sent to the exchange.

2. Payment Collection: It then initiates payment collection through payment gateways. Each gateway works with an underlying payment aggregator to gather the funds.

3. Payment Transfer: The payment aggregator transfers the collected money to the exchange's clearing corporation (ICCL).

4. Order Validation: The exchange verifies your order and the received payment. If the transaction occurs before the cut-off time, the exchange forwards the order details and funds to the AMC (Asset Management Company).

5. Unit Allocation: The AMC reviews your order and allocates units to your account once the funds are realized. The transaction is considered complete only after the AMCs confirm the fund realization. This process adheres to SEBI guidelines to ensure consistency and fairness in NAV application across the industry.

What happens if my order's NAV is delayed?

If your order's Net Asset Value (NAV) is delayed, it indicates that the mutual fund or investment product's NAV calculation and publication are taking longer than anticipated. This can have an impact on how your order is executed and priced. Most fund companies notify investors of any delays in the NAV computation. Look for any communications about the delay and potential causes from your broker or the fund house. Public holidays, technological difficulties, or extraordinary market volatility are common causes of delays.

Conclusion

In summary, the allocation of mutual fund units is governed by the NAV applicable on the day the fund house receives the investment funds, as outlined by the SEBI circular dated September 17, 2020. The realization of funds plays a crucial role in determining the NAV that will be applied to your transaction. Cut-off times have been established across the industry to ensure fairness and uniformity, and transactions are processed based on these times. Orders placed outside business days are treated as if made on the next business day, and any delay in fund receipt beyond the cut-off time will result in the application of the subsequent day's NAV.

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