What is the Mutual Fund Cut-Off Time?

Of late, the popularity of mutual funds in India has been on the rise. Mutual funds are special investment vehicles that pool funds from different investors and use them to invest in a basket of different securities. 

If you’re planning to invest in one shortly, you need to be aware of certain key concepts involving this investment option, such as Net Asset Value (NAV) and cut-off time for mutual funds. Read on to learn more about what the MF cut-off times are and their importance. 

What is NAV in Mutual Funds?

NAV is the price of a mutual fund unit. Unlike stocks, where the price is updated with each completed trade during market hours, mutual fund NAV is only updated at the end of a trading session. Once a trading session ends, the AMCs use the below-mentioned formula to determine the NAV of their fund. 

What are Cut-Off Timings in Mutual Funds?

When you invest in a mutual fund, you essentially purchase the units at the prevailing NAV. Here’s where the concept of mutual fund cut-off time is applied. The NAV at which mutual fund units are allotted to you is determined based on when you apply with the AMC relative to the MF cut-off time. 

For instance, if you apply before the cut-off, the units will be allotted at the current NAV. On the other hand, if you apply after the specified cut-off timing, the units will be allotted at the NAV that’s determined after the end of the trading session. 

Here’s a hypothetical example to help you understand how the cut-off time for mutual funds works. Let’s say that the prevailing NAV of a fund is ₹125. Now, assume you submit an application with the AMC to purchase 100 units before the specified cut-off time. The 100 units you purchased will be allotted at the NAV of ₹125. 

Now, say that you submit an application with the AMC for the purchase of the same 100 units. However, this time, you place the request after the specified cut-off time. The 100 units you purchase will be allotted at the new NAV that’s computed at the end of the trading day. Assume that the new NAV is ₹130. 

Since you placed the request after the specified NAV cut-off time, you had to pay an additional ₹500 [100 units x (₹130 – ₹125)], which adds to your cost of investment.  

What are the Mutual Fund Cut-Off Times in India?

The Securities and Exchange Board of India (SEBI) is the regulatory authority responsible for setting the mutual fund cut-off time in the country. According to SEBI rules, the cut-off timings vary depending on the type of fund and whether the request is for redemption or subscription. Here’s a table clearly outlining the various timings that are currently in effect. 

What is the New Rule for Mutual Fund Cut-Off?

Earlier, the NAV at which mutual fund units are allotted to you was determined based on when you applied with the AMC relative to the MF cut-off time. However, post SEBI circulars dated September 17, 2020 and December 31, 2020, a minor change in the determination of NAV was introduced. 

According to the circulars, all AMCs were mandated to allot mutual fund units at the NAV prevailing at the time of fund realisation and not the submission of the application. This change was made effective from February 01, 2021. Here’s a hypothetical example to help you understand how this new rule change affects the determination of NAV when redeeming or subscribing to a mutual fund. 

Assume that the prevailing NAV of a fund is ₹80. You submit an application with the AMC for the purchase of 200 units before the specified cut-off time. However, the AMC gets the funds only after the cut-off time. This means that the 100 units you purchased will be allotted at the new NAV computed at the end of the trading day. 

Let’s say that the new NAV is ₹90. Due to the delay in the transfer of funds, you had to pay an additional ₹2,000 [200 units x (₹90 – ₹80)].  

The new rule of NAV determination based on fund realisation applies to all kinds of mutual fund transactions including subscription requests, redemption requests and inter-scheme fund switch requests, among others. Even transactions that occur through lump sum investments, Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP) and Systematic Transfer Plans (STPs) are included. 

Applicability of NAV for Mutual Fund Transactions

Here’s a table clearly explaining the NAV applicable for various mutual fund transactions based on the mutual fund cut-off time. 

Why is the Mutual Fund Cut-Off Time So Important?

As an investor, you need to always be aware of the mutual fund cut-off time when placing redemption or subscription requests. As you’ve seen in the previous two examples, placing a request after the cut-off time essentially means that your units will be redeemed or allotted at the new NAV published at the end of the trading day. 

Depending on how the market has performed, you may end up paying a higher NAV for your mutual fund units. On the contrary, you may also end up redeeming your units at a far lower NAV than you had actually planned. That said, the converse may also be true. 

Therefore, if you wish to redeem or subscribe to a fund at the current NAV, always remember to place your request before the MF cut-off time applicable to your mutual fund. 

Applicability of NAV on Mutual Fund Switching 

When you switch between a fund you’re invested into a new fund, two transactions take place – a switch-out and a switch-in transaction. All switch-out transactions are considered to be on par with mutual fund redemption requests, meaning that the MF cut-off time applicable for redemption requests would be considered for determining NAV. 

On the other hand, all switch-in transactions are considered to be on par with mutual fund subscription requests. This effectively means that the cut-off time for mutual funds applicable for subscriptions would be considered when determining the NAV. 

Conclusion

With this, you must now be aware of what mutual fund cut-off times are. Remember, with effect from February 01, 2021, the determination of NAV for all mutual fund requests is done based on when the funds are transferred to the AMC and not on the time of request. 

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