SEBI proposes new cut-off timings to determine NAV for redemption of overnight Mutual Fund units

Markets regulator SEBI on Monday proposed extending the cut-off timing to determine the net asset value (NAV) with respect to repurchase or redemptions of units in overnight mutual fund schemes to 7:00 pm from the current 3:00 pm.

The proposal aims to facilitate operational ease for stock brokers (SBs) and clearing members (CMs) who invest client funds in mutual fund overnight schemes (MFOS) as part of a framework introduced in December 2023.

Under that framework, brokers and clearing members are required to upstream client funds to clearing corporations in the form of cash, fixed deposit liens, or pledged MFOS units to safeguard clients' funds.

MFOS, which invest in risk-free overnight government securities, offer brokers and clearing members a low-risk avenue to deploy funds.

“SBs/CMs shall ensure that client funds are invested only in such MFOS that deploy funds into risk-free government bond overnight repo markets and overnight Tri-party Repo Dealing and Settlement (TREPS),” the draft circular read.

“Further, such MFOS units are required to be in dematerialized (demat) form, and must necessarily be pledged with a Clearing Corporation at all times,” it added.

The proposed cut-off timing will allow additional time for un-pledging MFOS units and placing redemption requests after market hours, according to SEBI.

MFOS primarily invest in securities with a one-day maturity (e.g., government securities and repo markets). The money invested on T-day matures and becomes available on the next working day (T+1 day).

When investors submit redemption requests, the scheme does not need to sell securities in the market. Instead, the scheme uses the maturity proceeds of the securities held to meet the redemption obligations.

"Since the money has to be invested every day, for the amount of redemption requests received on T-day, such amount is not-reinvested on T+1 day and instead is used for payouts," the regulator said. "Due to this, the timeline of redemption, whether being 3 PM or 7 PM shall not impact the funds valuation or capability to redeem investments."

The draft circular is open for public comments, and stakeholders have until February 10, 2025, to submit their views.