SEBI’s New Rule for Mutual Funds NAV: What does it mean for you?

Created on 22 Sep 2020

Wraps up in 5 Min

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Updated on 24 Sep 2020


In the rising economic tensions due to the global COVID-19 pandemic, safeguarding the market investors' funds and rights is becoming increasingly important. Everyone is struggling hard to survive, if not grow, in this era of economic disruption.

Keeping all this in mind, the Indian capital market regulator Securities and Exchange Board of India (SEBI) is also trying to protect the investors in the Indian market. This seems to be the reason behind all major SEBI guidelines and reform mandates, which are coming forth almost every month of this year.

After its latest mandates on the market cap, SEBI has now come up with another new norm that could possibly alter the mutual funds' investment avenue.

This time with the new NAV rule, SEBI is now attempting to create a level playing field for all investors.

But first, let us briefly understand what mutual funds NAV actually is.

Mutual Fund Net Asset Value (NAV)

The net asset value represents the value of an entity. Theoretically, it is calculated by subtracting a company's total liabilities or a fund from its total assets. NAV is represented as the per-share value calculated for a mutual fund, ETF, or closed-end fund.

A mutual fund's assets include the various instruments it invests in, including cash, securities, shares, bonds, etc. On the other hand, its liabilities include money owed to the lending banks, pending payments, and a variety of charges and fees owed to various associated entities like agent fees, custodian or audit fees, management expenses, marketing expenses, etc.

The mutual funds NAV denotes the price at which the mutual fund units can be bought or sold. It is calculated by dividing the net asset value of the mutual fund schemes by the number of units outstanding on the valuation date.

NAV of Mutual Fund Scheme = (Total Assets – Total liabilities of Mutual Fund) / Total number of units

Now that we know what the mutual funds NAV is, let us understand what has been changed.

SEBI's new rule on Mutual Funds NAV

On September 17th, the Securities and Exchange Board of India (SEBI) issued a circular with a new set of guidelines stating that the units in a mutual fund (except liquid and overnight schemes) will be allotted at the Net Asset Value (NAV) of the day when the funds are available for deployment. SEBI has also instructed the mutual funds to uniformly apply NAV across different schemes upon the realization of funds.

Through its latest mandate, SEBI has also tightened its rules and norms on the process that was being followed by the fund managers in share trading.

The existing provision with regards to the NAVs of liquid and overnight funds has not been changed, and the deadline to receive an application for these funds will be 12.30 pm.

All the new norms, according to SEBI, will be effective from January 1st, 2021.

Earlier, mutual fund investors with cheque values of less than Rs 2 lakh per application could get the NAV of the product on the same day of deposit, irrespective of whether the money has been realized by the asset management company or not. However, those who invested more than Rs 2 lakh got the NAV of the day the fund house realized the cheque, which could be up to three days after the cheque was submitted.

Why the new mandate on Mutual Funds NAV?

With SEBI’s new rule on Mutual Funds NAV, it  has tried to create a similar trading platform for all kinds of investors across the mutual funds market and give them all a fair chance at the mutual fund market.

In its latest circular, SEBI said that the mutual fund schemes (except liquid and overnight) shall allot the units and NAVs based on when the funds have realized the cheques instead of the size or time of the investments.

The current (now previous) system of valuing the NAV based on the investment's size and time created a loophole in the system, which was used as an unfair advantage by many. In a rising market, some investors would submit multiple cheques of Rs 1,99 lakh per application, and in a falling market, some would dishonor the cheque, thereby hurting existing investors in the scheme. With the new norms in place, such practices can now be controlled.

SEBI also suggested that "There mutual funds should provide a written policy that provides details on specific activities, role, and responsibilities of various teams engaged in fund management, dealing, compliance, risk management and back-office with regard to order placement, execution of order and trade allocation amongst various schemes."

The market regulator added that now fund managers should place orders for each scheme's equity and equity-related instruments.

What will be the effect on investors?

SEBI’s new rule on Mutual Funds NAV might cause a delay in the allotment of units, especially for investors who use cheques, considering that it takes time for the amount to be transferred in case of cheques. For investors who use online and digital modes, there will be a shorter delay or minimal effect as their transaction time is significantly lower.

However, in both cases, it is not a matter of much concern for the long term investors as in an investment time span of several years, this new change would not affect much.

In all fairness, this new mandate would ensure a fair and healthy practice among investors who will get the allotment of units only after the money is available for investment.

The bottom line

With all its new guidelines and regulations, it seems like the Securities and Exchange Board of India (SEBI), this year is trying to safeguard and protect the interests of Indian investors in these critical economic times.

SEBI has also made it mandatory for fund houses to use an automated order management system and scheme-wise order placement in case the fund manager is managing several schemes.

Sebi's new rule on Mutual Funds NAV has been introduced to bring uniformity on net asset value (NAV) allocation as it discontinues with the investment limit criteria and makes it uniform for any amount of investment.

These rules have been put in the order with the aim of streamlining the mutual fund operations. However, will they be able to live up to what they are expected to do? Only time will tell.

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Anuja Khandelwal

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Anuja Khandelwal is a finance content writer at Finology. With a bachelor’s degree in Management and a master’s in mass communication and journalism, Anuja started writing blogs as a hobby, which later turned into passion. Together, with her passion for writing and interest in Finance, she wishes to create unique infotainment through her words.

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