Delay in mutual fund allotment robs retail investors of gains from June 4 market crash

The Indian benchmark indices, NSE Nifty and BSE Sensex, plummeted nearly 6 percent each on June 4.

Many mutual fund investors, who wanted to take advantage of the market crash on June 4, the day of election results, by making value-buying at lower levels, were in for a rude shock as they were allotted units based on the next day’s prices.

In mutual funds, the units are allotted to investors at the Net Asset Value (NAV) of the day on which the funds are received into the mutual funds’ accounts before the applicable cut-off time.

For example, say, investor A invested Rs 1 lakh before the cut-off time of 3 pm (as mandated by regulations) on June 4. If the funds are received in the mutual fund’s account before the cut-off time of 3 pm on June 4, the investor is allotted the closing NAV of that day. However, if the funds are received in the mutual fund’s bank account, at say 4 pm, on June 4, the allotment of units are done at the NAV of June 5.

The Indian benchmark indices, NSE Nifty and BSE Sensex, plummeted nearly six percent each on June 4 after election result trends showed that the Bharatiya Janata Party (BJP) would fail to get an outright majority on its own in the Lok Sabha elections.

To take advantage of the market crash, thousands of people invested lump sum amounts before the cut off time of 3 pm on June 4. However, many clients of investment platforms like Groww, Zerodha and ETMoney complained on social media platforms such as X (formerly Twitter) that they were allotted mutual funds units based on June 5 prices, the day when the markets had recovered close to 3 percent.

Investors alleged that the delay in allocating mutual fund units by a day robbed them of potential gains.

How the payment system works

In mutual funds, the units are allotted based on the time when the money reaches AMCs’ accounts. For that to happen, the money trail goes through multiple banking channels - sponsor bank, nodal bank, and eventually into the account of the AMC.

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Since the pooling of funds mechanism was introduced by the Securities and Exchange Board of India (SEBI) in 2022, the amount that gets debited from an investor’s bank account gets credited to the clearing corporation (payment settlement exchange) bank account. However, when the exchanges get the money, they won't get to know which client has invested how much money.

Here, payment aggregators upload an MIS (Management Information System) report, which is an instruction file, which helps exchanges to map the particular order to the payment. The BSE and National Stock Exchange (NSE) have internally kept the cut-off time for processing of  payments at 2:30 pm for equity funds.

What went wrong?

June 4 was an unusually heavy volume day for the Indian capital markets. As per industry insiders, investment platforms handled record investments being made in value terms.

A head at one of the investment platforms told Moneycontrol that the quantum of money invested via the lump sum route on their platform on June 4 was around seven times higher than what they handled on normal days. “More than that the volume, it was the value which was quite high,” he said.

“It is logical that the money could not be wired on time by the banks into the payment gateways account and from payment gateway accounts to the respective mutual fund companies,” he said.

According to a spokesperson at Groww, on June 4, some mutual fund customers experienced delayed unit allocation due to delayed money movement between banks, exchange and asset management companies (AMCs).

“Before SEBI's regulations in July 2022, brokers or MF distributors used to move money for MF investment orders to the exchange. After SEBI's new regulations on MF non-pool were implemented, payments are directly moved to the exchange, and then to AMCs without the broker/distributor. We are working closely with ecosystem partners to address these concerns and foster a better customer experience,” the spokesperson said.

Another source at one of the investment platforms said that a large private bank faced issues at their back-end, which resulted in  congestion in the system, thus delaying the processing of transactions.

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Industry experts estimate that around 95-98 percent of the mutual fund transactions made on June 4 were unaffected. However, with close to half a million mutual fund transactions being executed in a day via investment platforms, this would still mean that at least 10,000 transactions faced issues.

What’s the solution?

Investment platforms say that once the invested money leaves their system, they have no visibility on the next payment processes. “We only get to know once the units are allocated by the AMC,” said an executive at an investment platform on condition of anonymity.

“The bank collects the money, aggregates everything and then sends it to the (payment settlement) exchange. The exchange will then send the money in batches to the respective AMCs. Once realised, the AMC will allocate units, which gets reflected on our platform. Somewhere in this pipeline, a clog happened on June 4,” the person said.

Sreekanth Nadella, Chief Executive Officer and Managing Director of KFin Technologies, a registrar and transfer agency (RTA), said, “Gradually, the amount of time being taken within the banking channels is coming down. However, there is little an AMC, RTA or distributor can do within this. Depending upon which bank you use and or on which day, it may take 1 hour, 2 hours, 3 hours, and in some cases, even half a day for the money to be received by the AMC. UPI happens in real time, but not all banking transactions happen that quickly.”

The UPI transaction limit for mutual fund investments is Rs 2 lakh per transaction, making it unsuitable for large lump-sum investments. The majority of large investments in mutual funds still happen via net banking.

Remedy for investors

According to SEBI regulations, in case of any NAV delay, the particular party that has defaulted will be liable for any compensation to investors.

An executive at an investment platform said that they are speaking to regulators on what happened and how they can amicably resolve this issue. Investment platforms are also in touch with payment gateways to figure out what can be done to avoid a repeat of this issue.

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For aggrieved investors, the recourse would be to take up their concerns with their respective investment platforms and the SEBI Complaints Redress System (SCORES), an online platform that allows investors to file complaints against SEBI-regulated entities.