SEBI has issued a new set of guidelines for the application of NAV in the case of mutual funds. Under the new guidelines, the mutual funds houses must apply NAV across all schemes, when the funds get realized. SEBI wants to make the workings of the mutual fund industry more and more transparent, through these new guidelines. The buying process has also been made more strict, which the fund managers presently use to purchase shares.
A Study Of New Guidelines
The new set of guidelines will go into full effect from January 1st, 2021. At present, an investor in a mutual fund whose cheque (or all other modes of payment) value is lesser than Rs.2,00,000 per application, receives the NAV of the same day only, when he has made the deposit. But in the case the value of investment amount exceeds more than Rs.2,00,000, then an investor will receive NAV of the particular day when the cheque has been realized. The duration period for the realization of the cheque can range from one to three days, starting from the day when the cheque has been submitted by the investor.
SEBI aims to ensure that no kind of illegal activity occurs in the mutual funds market. Because these kinds of illegal activities can incur huge losses for investors. It can also reduce the trust of people in the workings of the financial market. So with these new sets of rules, SEBI has created equal opportunities for all kinds of investors. Also, these new rules will attract those investors, who are afraid of making an investment in mutual funds.
WHAT IS NAV ?
NAV (Net Asset Value), is the fund’s per-share market value. It is calculated by subtracting the sum value of liabilities from the sum value of assets. A large section of investors uses NAV to judge the performance of mutual funds. But according to financial experts, NAV should not be the only factor. Instead, an investor must go through a series of factors such as “carefully assessing the previous years performance of a mutual fund, comparing the fund’s performance to a benchmark. This will help an investor to judge the fund’s performance in a better way. When an investor has pondered over all these factors, then he will be able to make a better investment decision in the present.
Why Were New Guidelines Needed ?
According to details of the circular issued by SEBI, only “Overnight Funds” and “Liquid Funds” are an exemption. Rest all kinds of mutual fund schemes must allot the fund units and the NAV only when the cheques have been realized. Previously the decision for allotment and NAV was based on “Size and Time of Investments”. SEBI knew that without these new guidelines, some investors would find loopholes in the workings of the mutual fund industry. And these loopholes can be used for earning gains illegally.
A particular example of the loophole is the incidence, when a certain section of investors was found to be depositing multiple cheques of Rs.1,99 lakh rupees. As this process allowed them to take advantage of the loopholes in the previous guidelines and also hurt the earnings of honest investors.
SEBI has also said that the mutual fund houses must draft a plan which precisely entails their working procedure, the delegation of roles and responsibilities to people, risk management policies, the working of the fund management, and other policies which ensure the safety of the investor’s amount and also protect him from any kind of fraud or illegal activity.
SEBI has mentioned in it’s new sets of guidelines that the orders for equity and it’s related money market instruments of specific schemes, must be placed by fund managers of the respective schemes.