Large mutual fund investors won't enjoy unfair advantage of NAV

Investments of more than Rs 2 lakh will get NAV of the day the money is realised

Institutional investors and high networth investors, who enjoyed the advantage of a higher net asset value (NAV) for their mutual fund (MF) investments for free, will no longer be able to do so.

Starting from 1 October, the applicable NAV for mutual fund investments of Rs 2 lakh or more is the closing NAV of the day on which the funds are available for utlisation and not against the closing NAV of the day when the application was made.

"To be fair to existing investors of MF schemes, it was decided to harmonise applicability of NAV across various schemes based on the day on which the funds are available for utilisation, for an amount equal to or more than Rs 2 lakh,'' said Securities and Exchange Board of India (Sebi), in a circular.

According to experts, the concept of future NAVs will make calculation of NAVs more accurate.

Under the earlier method of calculating NAVs, for large investors the benefit was sizeable since they invest huge amounts, says Surajit Misra, executive vice-president and national head, mutual funds, Bajaj Capital.

"For instance, earlier, it was possible for investors to apply for an MF on Friday and get the NAV applicable for Monday, since it would take two days for the funds to get realised. This was especially advantageous for investors of debt funds, since it is unlikely that in a debt fund the NAV would go down, unless it was marked-to-market. Only in equity funds does the NAV actually go down. So, this move is a good one,'' says Misra.

In the case of equity funds, there are instances where investors would wait till 2.30 pm, and based on their expectation of how the market would move the next day, would apply for MFs. They would get the NAV for the day they made the application. Supposing the next day the market rose, they would sell their MF holdings, thereby gaining the advantage of the higher NAV, without the money actually going from their accounts.

The extra day's benefit that large investors got was at the cost of the exiting ones. The MF house also made money from fees paid at the time of application and while redeeming the units. But, under the new guideline, large investors will no longer be able to enjoy this advantage.

The NAV is the total market value of all the assets held in the MF portfolio less the liabilities, divided by all the outstanding units. It measures how much each share of a MF is worth. So essentially, the NAV of a MF is the cost of one share of the fund. MFs usually declare the NAV after market closing hours for the day, since the price of the underlying holdings – equity or securities — keep changing during the day.

According to Dhirendra Kumar, chief executive officer of Value Research, investors can, even now, take advantage of the higher NAV by putting amounts of less than Rs 2 lakh. These investors would get the NAV of the day they apply. But the advantage of a higher NAV will be meaningful only for higher amounts, say Rs 20 lakh to Rs 2 crore. "It is unlikely investors will go to that much trouble now," says Kumar.