Mutual funds are an investment option that pools investor’s money and re-invests in a range of asset classes to seek capital appreciation. Risk-averse investors and those looking for professionally managed investment avenues may consider investing in mutual funds.
However, investors must understand the technical details involved in the buying and selling of mutual fund units. Mutual fund cut-off time is one such technicality that investors must be aware of. A commonly ignored aspect of mutual funds, this article tries to explain it in detail.
This article covers:
- What is mutual fund cut-off time?
- How does mutual fund cut-off time work?
- Latest SEBI norms for mutual fund cut-off
- Why is cut-off time important in mutual fund transactions?
What is mutual fund cut-off time?
Investors in the market can purchase mutual funds based on the NAV (Net Asset Value). A mutual fund’s NAV keeps changing based on market fluctuations. Keeping this in mind, the Securities and Exchange Board of India (SEBI) prescribed a cut-off time for mutual funds to determine what NAV value and which day’s NAV value will be applicable for the investor when subscribing to mutual funds, based on the time they submit their application.
Mutual fund cut-off time can be understood as the predetermined time before which investors must submit their purchase order and make the transactions to ensure they get the same day’s NAV. The cut-off time for mutual funds determines if the transaction will be carried out at the NAV of the same day or the previous day.
Investors sometimes confuse trading hours with cut-off time. The trading hour is the allotted time wherein investors can buy and sell mutual fund units. Cut-off time for mutual funds, on the other hand, determines what NAV will the same investor get at which they can buy and sell mutual funds. It is important to note that the cut of time for different types of mutual funds may vary.
How does mutual fund cut-off time work?
Until the digital transformation in the financial markets, investors had to rush to offices of AMCs (Asset Management Companies) or their RTAs to submit applications for the purchase of mutual funds based on that day’s NAV. The most important thing investors had to make sure was to submit their applications before the mutual fund cut-off time to get the same day’s NAV.
Digitally too, investors have to make sure that their applications are received by AMCs before the cut-off time to be processed on the same day.
To bring some standardization to the process of purchasing mutual funds using the NAV, SEBI has come up with a guideline for cut-off time for mutual funds. In the light of the COVID-19 pandemic, RBI reduced the trading hours and revised the mutual fund cut-off time, which has been in effect from 1 February 2021.
Latest SEBI norms for mutual fund cut off
The mutual fund cut-off timings have been changed after the COVID-19 pandemic hit the country. The mutual fund cut-off time for liquid and overnight funds has been changed to 12:30 PM, and that for all other funds is now 1:00 PM.
Mutual fund type
|Pre-COVID mutual fund cut-off time||New cut-off time for mutual funds|
|Liquid and overnight funds||1:30 PM||12:30 PM|
|Other funds||3:00 PM||1:00 PM|
|Redemption of all funds||3:00 PM||3:00 PM|
As per SEBI’s new rule for cut-off time for mutual funds dated 17 September 2020, the NAV applicable on the purchase of mutual fund units is subject to the realization of funds. This means that the applicable NAV on your purchase will be considered valid when the AMC or the fund house receives your payment.
Hence, the cut-off time for mutual funds has become less relevant, with more importance given to the realization of funds with the fund house. Even if the investor applies to the fund house before the cut-off time, the allotment of units will be done based on the NAV on the day of the realization of funds. The new rule applies to all forms of mutual fund investments irrespective of the amount of investment.
The NAV based on the realization of funds is applicable on both lump-sum investments and SIPs, including Systematic Transfer Plan (STP) transactions.
If the receipt of the transaction is received and accepted before the cut-off time, with funds being available for the transaction before the cut-off time, the NAV of the same day shall be applicable on the transaction.
If the receipt of the transaction is received and accepted before the cut-off time, but the funds will be available on the following day, the NAV of the following day will be applicable on the transaction.
Why is cut-off time important in mutual fund transactions?
The NAV of a mutual fund is declared at the end of the trading day after the market closes. Investors who want to buy mutual fund units at this NAV must submit their purchase order and transfer funds before the cut-off time to receive the NAV of that day.
If an investor wants to benefit from the spike in the market, knowing that the closing NAV will be higher than what they purchased the units for, then they must make it a point to submit the sell order before the mutual fund cut-off time to get the NAV of the same day.
Mutual fund cut-off time has streamlined the process of buying and selling mutual funds with a threshold for transactions to be done according to a particular day’s NAV. It is important to remember that the fate of your mutual fund investment lies in small elements like mutual fund cut-off time. For instance, not buying or selling mutual fund units at the right time because you missed the cut-off time could incur losses.