Cut Off Time for Overnight Funds: SEBI Proposes a Change

For subscriptions and redemptions of mutual fund units, there is a set cut-off time. When you buy or sell units of your mutual fund scheme, the Net Asset Value (NAV) you receive is determined by the cut-off time.

The time you submit your application to the fund house, or the Registrar & Transfer Agents will determine the allocation of NAV for the transaction.  This time is known as the cut-off time in the world of mutual funds. Distinct mutual fund categories, including liquid, debt, and equity funds, have different cut-off times.

[Read: What Is the Cut-off Time to Transact in Various Mutual Funds]

SEBI's Proposal

SEBI has come up with a Consultation Paper recently to make a change in cut-off timings to determine applicable NAV with respect to repurchase and redemption of units of 'Overnight Mutual Funds'.

Overnight Funds are open-ended debt mutual fund schemes that invest in securities that mature in one day. The category usually invests in Tri-party Repos, Reverse repo, and other debt and money market instruments with one-day maturity. It is a low-risk, low-return bet compared to its peers in other debt mutual funds category.

Given this characteristic, Overnight Funds are used by various market participants, including stockbrokers (SBs) and clearing members (CMs) to deploy their client funds. It ensures minimal risk transformation of client funds (that are withdrawable on demand) available with SBs/ CMs.

As per SEBI, SBs/CMs shall ensure that client funds are invested only in such Overnight Mutual Fund Schemes that invest in risk-free government bond overnight repo markets and overnight Tri-party Repo Dealing and Settlement (TREPS). Moreover, such holdings in Overnight Funds by SBs/CMs need to be in dematerialised form.

Considering this and for operational purposes, a working group of industry participants, AMFI and members of the Mutual Funds Advisory Committee (MFAC) has recommended a change in cut-off timings to determine applicable NAV with respect to repurchase (redemption) of units in Overnight Mutual Fund schemes from existing 3:00 PM to 7:00 PM.

What is the Objective Behind Changing the Cut Off Time?

The intent is to allow time for SBs/CMs to un-pledge units of Overnight Funds and place redemption requests with the respective mutual fund house, after the close of market hours.

Note, the Overnight Fund/Schemes receive money invested in securities with 1-day maturity on the next working day.

For meeting redemption requests, the Overnight Funds/Schemes don't have to make any sale transactions before market hours. Instead, the Overnight Fund/Schemes, based on redemption requests, may decide not to reinvest the maturity proceeds to be received on the T+1 settlement date. Since the money needs to be invested every day, for the amount of redemption requests received on T-day, such an amount is not reinvested on T+1 day and instead is used for payouts.

Considering the aforesaid, according to SEBI the timeline for redemption, whether 3:00 PM to 7:00 PM shall not impact the fund valuation or the capability to redeem investments.

The regulator has placed this proposal to change the cut-off time to determine the NAV of Overnight Funds for public comments until February 10, 2025. One can comment or make suggestions on this proposal here- https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=yes

To Sum Up...

In my view, this is an operational change proposed by SEBI and will not have an impact on the Overnight Funds per se.

For investors to park money for the very short term - a few days or week - Overnight Fund is a worthwhile option for risk-averse investors who want high liquidity.

That said, since Overnight Funds avoid investing in risky securities, this sub-category of debt funds also offers relatively lower returns. Overall, on the risk-return spectrum of debt mutual funds, Overnight Funds are placed at the bottom, making them a very low risk-low return proposition. Overnight funds are ideal for building a contingency fund or addressing very short-term financial goals.

Most Overnight Funds offer an instant access facility for redemption. As an investor, you get the redemption proceeds in your bank account on the same day as the request application.

Keep in mind that the instant access facility for Overnight Funds is only available for the online mode of transaction. Ensure that you select the 'instant redemption option' when you place the redemption request.

Be a thoughtful investor.

Happy Investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.