SEBI has come up with another proposal for the Mutual Fund industry which the fund managers and investors are cheering for. It has proposed to extend the cut-off time for determining NAV for mutual fund redemption from the present 3 PM to 7 PM. So, why did SEBI propose this extension? How can it affect the investments/ investors or the market as a whole? Let’s find out in this blog.
Reasons Behind the Proposal
SEBI has proposed this change in the cut-off timing for determining nav for the redemption of mutual funds and this is only for the overnight schemes. Right after SEBI directed the stock brokers and the clearing houses to transfer clients’ funds to clearing corporations at the end of the day, this proposal came in. The transfer can be done in any of the following –
- Cash
- Lien of fixed deposits which are made out of clients’ funds
- Pledge of units of mutual fund overnight schemes which are again made out of funds of the clients.
This change in the timing will help the clearing members and the stock brokerage houses to have more time to un-pledge MFOS units and place redemption requests after-market hours with the mutual fund houses.
These mutual fund overnight schemes get the money invested in the 1-day maturity securities on the proceeding working day. With this extension of the cut-off timing, the fund houses can do mutual fund redemption post-market hours as well.
However, this extension won’t affect the valuation of the funds or their redemption capabilities because the amounts redeemed are not re-invested on T+1 day. Instead, these amounts are for payouts.
SEBI’s Consultation Paper
In a consultation paper issued by SEBI on 20 January 2025, it said that investments in these overnight schemes of mutual funds have become a new space for SBs and CMs to invest the funds of their clients. It ensures minimal risk transformation of the funds which are withdrawable on demand and available with the SBs and CMs. The risk is minimal as the tenure is only for one night, and the underlying instruments are government securities.
Brokerages and CMs need to ensure that the funds of the clients are invested in MFOS which invests in the government’s bonds with overnight exposure in the repo market and overnight tri-party repo dealing and settlement (TREPS).
The consultation paper only suggested building a team with industry participants, AMFI, and the Mutual Fund Advisory Committee (MFAC). This team will be operationalised to see whether and how this cut-off time can be extended.
Source: MoneyControl
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