The year 2020 has been nothing short of a rollercoaster ride for Mutual Fund investors. We have seen how markets fell by 40% before recovering remarkably by 80%! These fast and furious ups and downs mean that the regulators had to cope with lots of quick policy changes to smoothen the ride of an average retail investor. One such update is about the changes in the Net Asset Value (NAV) allocation for the Mutual Funds from 2021. In this blog post, we will discuss everything you need to know about the SEBI circular on Mutual Funds NAV and how it affects your investments. Read on.
The Securities and Exchange Board of India (SEBI) has issued a circular on September 17, 2020, on the changes to mutual fund NAV allocation. These changes are mandatory from Jan 1st, 2021 for all mutual fund transactions. Before delving deep into what these changes are, let us first try to understand the existing scenario.
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How mutual funds NAVs are allocated till December 31st, 2020:
All investments in liquid mutual funds used to get the NAV of the day when the money actually reaches the mutual fund company. The same rule applies for transactions in other non-liquid funds exceeding Rs. 2 lakhs. Now, these rules have been extended to all the remaining mutual funds as well. Till Dec 31st, 2020, for all investments in non-liquid mutual funds (i.e., equity and debt mutual funds), the AMCs use to allot same-day NAV irrespective of whether the money actually reaches the AMC or not. Now this will change.
The mutual fund NAV changes from Jan 1st, 2021:
If you invest in Mutual Funds from the year 2021, the mutual fund company allots the NAV of the day when the companies actually receive funds in their account. This applies to investments in all mutual funds irrespective of amount and type. This may not affect you much if you are paying via Netbanking or UPI. But for those who still use cheques to pay for the mutual funds’ transactions may not get the same-day NAV.
Why these changes are brought in?
Assume that you have noticed a sharp correction in the market on a particular day and want to cash in. So you go to the AMC office and issue a check expecting to get the same-day NAV. Now, the AMC will have to settle the check through your bank. This could lead to a delay in the payment receipt by the Mutual Fund company. Up until now, the AMCs used to borrow funds in order to buy equities for such orders. This means the AMC and in turn, the existing investors have to bear the interest charges over the funds borrowed by the AMC. Thankfully, this rule changes this anomaly.
How to ensure same-day NAV for mutual funds in the new rules?
SEBI has made it clear that the AMCs have to allot NAV of the day when the AMC actually receives the funds for the transactions done. However, still many investors do visit offices and pay via cheques, etc. To minimize the effects of the new circular on NAV, it is better to use internet banking/NEFT/RTGS in place of cheques, if you can. However, these changes make no big difference for long term investors as they invest over a span of years. One or two days delay in mutual fund NAV allocation ideally shouldn’t add much difference to such investors’ portfolios.
Related: Read about Tax-loss harvesting to save on taxes.