NAV will no longer be the the date of purchase for mutual funds?

[megusta]

So I got the below message from Niyo Money. It's pretty clear on what will happen but not on why they are making this change.

This will also hamper the ability of people buying mutual funds to time the market. T+2 is way too late and that's not even guaranteed. Whose interest is this serving?

Hi ,

Wishing you a Merry Christmas and a Happy New Year!

As per the recent SEBI circular there are some changes in the NAV allocation for all the investment transactions from Jan 1, 2021 onwards.

In order to understand the changes, please remember that when you make an investment, the money gets debited from your account and goes to the payment processors account (eg Razorpay) who then forwards it to the bank account of the respective Mutual Fund companies. This forwarding does not always happen in real time and can sometimes take an extra day or two depending on the payout and reconciliation processes at the payment partner’s end.

Existing NAV allocation:


For investments in non-liquid funds (i.e. all equity funds and other debt funds) of amount below ₹2 Lakhs made before the cut off time, Mutual Fund companies allotted the NAV of the same day irrespective of whether the investment amount reaches their account or not. If the money then never reached their bank account then Mutual Fund companies would reverse the investment transaction.


For e.g. for a lumpsum investment in Axis Long Term Equity Fund for ₹10,000 on 15th December before the cut-off, you would get the NAV of 15th December itself. This would be the case even if the money is actually credited to the Mutual fund account by the payment partner on 16th December or 17th December (which could happen when paying via E-mandate for example).

New NAV allocation from Jan 1st 2021:

From Jan 1st 2021, all investment transactions, irrespective of the amount and type will be processed by the Mutual Fund companies only when the money reaches their account.

Based on current money transfer systems via banks, we have come up with likely NAV allotment dates for different types of investments and payment methods available on Niyo Money. Please note that to ensure safety and regulatory compliance, the money never goes through our accounts and directly goes from your bank account to the Mutual Fund companies’ account directly via the payment partners so we have no control over the timelines.




*These are the most likely but not guaranteed timelines. NAV date could be later than that mentioned here. The money movement is dependent on the banking systems and we have no control over them.

T = Day on which transaction is made or next business day if the transaction is made on a non business day. For SIP transactions, T means SIP date. T+1 means one business day after the transaction date, T+2 means two business days after the transaction date and so on. So for eg. if a transaction is made on Friday (T) then T+2 will mean Tuesday. All Saturdays and Sundays are non business days for the MF companies.

You can read about NAV allocation in detail here.


Important Note:

This is a big change and requires coordination and efforts amongst platforms like ours, RTAs like CAMS and Karvy, Mutual Fund companies, payment gateways and NPCI. It may take some time for various stakeholders to streamline their processes. Based on this, we’ve been told to expect some deviation from the likely NAV allotment dates (mentioned in the table above) till the end of February 2021.

P.S. This is an industry level change for Mutual Funds and not just for Niyo Money. Also these changes only apply for investments and not for redemptions.

Best
Team Niyo Money

 

[cathy100]

@megusta For anyone who wants to understand why this is happening. You first need to understand that this was already happening for all Liquid fund orders and any orders above Rs 2,00,000. Now, there are 2 questions to clarify-

1- Why was this already happening for all Liquid fund orders and any orders above Rs 2,00,000?

2- Why is this being extended to all orders now?

Lets answer the 1st question first with an example -

1- Assume that there is an equity fund with AUM of Rs 100 Cr. On X day you notice that the market is going down drastically, lets say 10%. You are sitting on Rs 1 Cr cash yourself. Seeing the market fall, you want to take benefit of the opportunity. You place an order of Rs 1 Cr in the fund within the cut-off timing on that day. Now your order has gone to the AMC and you start expecting NAV of the same day. However, when you try to make the payment you realize that your bank is not allowing you to make that kind of transfer instantly (transaction limit). They need some time to increase transaction limit for you. You are finally able to complete the payment on the next day (X+1). You go back to living your life and assume that transaction will get processed as expected.

But what happens at the AMCs end?

Let's assume that in this case the AMC needs to allot units on the basis of date of order placement, not on the basis of funds realization. In order to do so, AMC needs to purchase equity shares worth Rs 1 Cr on X day. But where will the AMC arrange for Rs 1 Cr from? Remember, you were able to transfer your funds only by X+1 day. AMC will most likely have to take a loan to finance your purchase. In that cases, it is a cost to the fund and thereby a cost to other unit holders.

Whats worse?

You did the transfer on X+1 day but that doesn't mean that the AMC will receive the money on X+1 day as well. Depending on your bank, payment method, payment gateway, AMCs bank and many more similar factors, AMC might end up receiving your money with 1-2 day delay. If AMC received the money by X+3 then in a way existing unit holders would be paying 3 days interest on your behalf in order to ensure same day NAV for you. This could be much worse if you didn't pay at all in the first place (the comment would become too long if I explain this too here, will do so in a follow up comment if people want me to).

So the answer to 1st question is -

This regulation was in place for liquid funds and orders above Rd 2,00,000 to make sure that existing investors of a scheme do not suffer to smoothen the entry of new investors.

Now the 2nd question is very simple to answer -

Even with 2 lakh limit, there was enough scope for the existing investors to suffer if majority of new investors in a scheme placed orders under 2L limit on a day. So, going forward, regardless of the order amount, NAV will be of the day on which AMC receives the funds. Remember, many mutual fund investors still place orders by visiting offices and submitting cheques (you can imagine the kind of settlement delays that come up there). Even with online transactions, time to settle funds depends on multiple factors.

PS: Posted using mobile, excuse me for typing errors please.

 

[resjudicata]

@cathy100 Heck, MFs should start accepting UPI, instant real time settlement.

I understand it's only upto 1L but it's better than to have nothing.

 

[cathy100]

@resjudicata MFs do accept UPI payments.
Groww and Kuvera are 2 platforms which I recall to be accepting UPI payments for sure. I am sure there are many more.

Also, I never use UPI as a payment mode for investing as UPI in general has a terrible failure rate and it has only been getting worse recently.

 

[rjj4321]

@cathy100 I don't know about this in detail, but the parties mentioned are intermediate brokers, right? The delay is from payment to reach AMC. Reconciliation of funds still may take time.

 

[michaelkep]

@cathy100 Paytm money accepts upi too

 

[resjudicata]

@michaelkep Yeah.. but Paytm is a aggregator so well not give same day nav

 

[nickel]

@resjudicata

Yeah.. but Paytm is a aggregator so well not give same day nav

Is this a new change or has it been this way forever? I have invested some money through Paytm money and got same day nav (confirmation emails from AMCs).

 

[cjs17]

@cathy100 Not upi really, I see high failure rate on Google pay only. Phonepe works great

 

[binhhb8b]

@cjs17 Paytm is better. GPay is having high failure rate.

 

[jusbnme6]

@cjs17 Phonepe fails a lot for me.

 

[branannabanana]

@resjudicata UPI settlement isn't real time. It is just pseudo real time in case of P2P transactions because the beneficiary account is credited immediately. The beneficiary bank is actually settled to in six hour cycles.

For non-P2P cases (most merchant payments including all MF use cases), funds are settled to Paytm money/zerodha/whatever on T+1 or T+2 by aggregators like razorpay, PhonePe, Google Pay etc.

This is a gross simplification of what actually happens, but the short answer is that settlement is never real time.

 

[abidingbranch]

@branannabanana I know it's an old thread, but can you please share some pointers on where can I learn more about this?

 

[resjudicata]

Which part did you not understand ?

With all these platforms.. funds are transferred to a intermediary (payment aggregator) account. The aggregator transfers the funds on the next day to the MF. This is applicable even if you use a faster method than UPI, account to account transfer (transfer to the beneficiary account within the same bank) thru internet banking.

There are 3 possible cop outs

Invest directly via AMC website. If you invest with multiple AMC, passwords will be a issue. Major plus point is that you can invest with minutes to spare. Most MF accept UPI or web banking.

MFU - Single point similiar to kuvera and co.. But ensure you transfer funds at least 1.5 hours before cutoff. They offically request funds to be received by them at least thirty minutes before cut off time

CAMS - Use the cams/Karvy app. This should cover most funds and is more reliable than mfu.

Another, (non popular ?), is buy funds in demat which uses the BSE star platform. Zerodha coin is my poison of choice. Cut off time was 1.30 and accepts UPI /NEFT to fund the zerodha "wallet".

Considering the new guidance, zerodha may revise timelines for liquid funds (cut off 1.30 currently)

 

[resjudicata]

Invest directly via AMC website. If you invest with multiple AMC, passwords will be a issue. Major plus point is that you can invest with minutes to spare. Most MF accept UPI or web banking.

I'm currently buying directly from AMC and have biller setup so money is auto debited from my bank account without me having to login to AMC or netbanking, so is that money instantly settled to the AMC?

Honestly, I don't understand how people are comfortable using paytm money, groww or kuvera. I don't want to provide my personal information to third parties, am paranoid about what if they sell that data to someone or abuse it themselves.

 

[cloejb]

@megusta I worked on building a mutual fund platform previously and here's how the system works:

1. You make a purchase for a mutual fund.
2. Money gets sent to the payment gateway and the order is sent to the RTA(who forward it to AMC).
3. AMC allocates the unit to you as per the current NAV, but mars the units as payment pending, so you can't redeem now.
4. PG transfers the money to AMC in batches to save transaction fees, and Platform shares a mapping of amount to transaction, and then AMC reconciles the transferred amount with the unit requests received. For any missed payments, it reverts the unit allocation, otherwise it removes the payment pending flag. This process can take 1-2 days depending on working days and batch timings.

I'm assuming the new circular states that units can only be allocated when 4 happens? That's going to cost platforms a LOT more in transaction fees if they can't batch them.

It might be better to make a purchase directly from the AMCs since that shouldn't take additional reconciliation time and track them on other platforms using CAS uploads.

 

[vtachy]

@cloejb

It might be better to make a purchase directly from the AMCs since that shouldn't take additional reconciliation time and track them on other platforms using CAS uploads.

This is the money quote. Perhaps try out if there is a difference between AMCs and other platforms, and stick to buying from AMCs if that is the case?

 

[cathy100]

@vtachy Its not that straightforward. Even AMCs have to use some payment gateway and still complete payment reconciliation at their end. I know for sure that some AMCs have terrible payment gateway integrations and some are just operationally inefficient.

I would rather stick to BSEStarMF backed platforms (The ones where money goes directly to BSE, instead of the platform). They have a clearing house (ICCL) dedicated specifically for clearing of funds. I am comfortable trusting BSEStarMF in this case as transferring funds is literally theit bread and butter.

I do agree with one point though. If someone has enough time they can try placing orders with a particular payment method with all AMCs one by one. If a particular AMC is noticeably faster then other AMCs and faster then BSEStarMF backed platforms too then it would be worth placing orders directly with that AMC.

 

[jesus_save_me]

@cathy100 Kuvera is backed by BSEStarMF, if I am not mistaken.

 

[lakecrescent]

@vtachy What is AMC? If I am buying axis long term equity mutual funds as SIP through a broker company , what should I do to avoid this going forward?