The mutual fund (MF) industry faces an operational issue. Even after the changes in cut-off times, switches from equity to debt schemes would need to be done before 1pm to get the same day’s net asset value (NAV).
From October 19, the cut-off time for investing or redeeming from equity schemes (at same day’s NAV) has been restored to 3pm. Industry executives say a change or clarification for equity to debt fund switches should have been sought to avoid confusion. Industry estimates suggest that around 3,500 such switch transactions are processed daily.
“Equity to debt fund switching has been common among MF investors, as they are booking profits in the current market rally and parking the amounts in relatively less volatile debt schemes. If an investor now exits from an equity scheme closer to market close of 3.30pm and moves the funds to a debt scheme, he would get the next day’s NAV of the debt scheme,” says the chief executive officer (CEO) of a fund house.
He adds that “While restoring the cut-off time for equity schemes to 3pm helps an investor time the market better, getting the next day’s NAV after the 1pm cut-off in a debt scheme would make such switches less attractive.”
While not common, interest rate movements could lead to sharp volatility in certain debt categories even in a short span of a day. “If MF investors get the next day’s NAV in such scenarios, they may not look at it favourably,” says another CEO of a fund house.
“Switching of assets can help distributors ensure assets remain in MF products, rather than move back to the bank account of the investors. This makes switching an important tool even from the industry’s point of view,” the second CEO adds.
"It is a complex situation. If time is an important factor, advisors and investors would need to keep in mind that such switches would lead to assignment of the next day's NAV for debt schemes, if done after 1pm. This will have an impact on retail investors, as any investment over Rs 200,000 would anyway get the NAV of a few days later, on realisation of funds," says Amol Joshi, founder of Plan Rupee Investment Services.
Technical hurdles
While stating that the issue was not envisaged earlier, the Association of Mutual Funds in India has proposed a solution to the Securities and Exchange Board of India (SEBI).
Now, AMFI has proposed that for such switches (equity to debt fund), the exit NAV of the equity fund as well as the entry NAV of the debt scheme would be the next day’s.
The industry body also pointed out that the systems in place with the registrar and transfer agents (RTAs) are currently built to process switch-out and switch-in legs of a transaction with value less than Rs 200,000 “concurrently for the same business day’s NAV in both the schemes.”
“Therefore, the RTAs are not in a position to handle the above scenario, with effect from October 2020 due to the short notice,” according to the mail.
AMFI says the situation would lead to confusion, especially among retail investors, and may also cause unnecessary complaints. Unlike institutions, retail investors (investment less than Rs 200,000) may not be familiar with the concept of switch-out and switch-in units on two different business days.
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