Did You Invest in MFs On June 4 But Were Allotted Units The Next Day? Know Here Why

Indian markets experienced a dramatic reversal on June 4th, 2024. The S&P BSE Sensex and Nifty 50 plummeted by 5% each, wiping out the gains made earlier in the week. The Nifty plunged 1,200 points to reach a low of 22,000, while the Sensex tumbled over 4,000 points to a low of 72,337.

This triggered a wave of investor activity, with many seeking to 'buy the dip' by investing in mutual funds (MFs) at lower Net Asset Values (NAVs). However, many investors who placed orders before the cut-off time were surprised to find their units allotted based on the NAV of June 05, 2024, missing out on the potential gains from the lower prices on June 04, 2024.

This article delves into the details of this incident, exploring the reasons behind the delay, the impact on investors, and potential solutions.

NAV and Cut-Off Timings

NAV represents the per-unit price of a mutual fund scheme, reflecting the underlying assets' value. Investors typically aim to buy units when the NAV is low, as it translates to acquiring more units for their investment.

Mutual fund purchases follow a T+1 settlement cycle, meaning the purchase is settled on the business day following the order placement, provided the order is placed before the cut-off time (usually around 3:00 PM). This cut-off allows the Asset Management Company (AMC) to receive the funds and calculate the NAV for the day based on the closing prices of the underlying securities.

The June 04, 2024 market crash presented a lucrative opportunity for investors seeking to capitalise on lower NAVs. Many investors rushed to invest in equity mutual fund within the cut-off time, anticipating significant gains as the market recovered.

[Read: 5 Best Mutual Fund Types to Benefit During Modi's Third Term]

The Technical Glitch and Its Impact

Unfortunately, a technical glitch disrupted the smooth processing of these investments. The issue arose due to delays in money movement between banks, payment aggregators, exchanges, and Asset Management Companies (AMCs).

Zerodha's MF investment platform 'Coin' mentioned, that the transactions got delayed due to issues with reporting fund transactions from payment aggregators to the Indian Clearing Corporation (ICCL) across all platforms. The NAV applicability is determined by the exchange based on the date ICCL receives the funds.

Traditionally, brokers facilitated the transfer of funds for mutual fund investments. However, new SEBI regulations implemented in July 2022 shifted this responsibility. Under the new system, payments are directly routed from the investor's bank to the exchange and then to the AMC.

This new process is believed to have contributed to the delays experienced on June 04, 2024. On June 04, the high volume of transactions coupled with potential delays at payment aggregators caused a bottleneck in the transfer process. The money from many investors' accounts did not reach the Indian Clearing Corporation (ICCL) by the cut-off time. As per SEBI regulations, if the funds haven't reached the ICCL, the NAV allotment cannot be processed on the same day.

Despite placing orders well before the cut-off, many investors were surprised to receive units based on the June 05, 2024 NAV. This meant they missed out on the lower prices available on June 04, 2024 potentially impacting their potential returns.

Several factors contributed to the delays experienced on June 04, 2024:

• Increased Transaction Volume: The sudden market plunge incentivised a surge in investor activity, placing a heavier load on online investment platforms.

• Payment Gateway Delays: High transaction volume overwhelmed some payment gateways, causing delays in transferring investor funds to the Indian Clearing Corporation (ICCL). The new payment processing system, while efficient, faced teething troubles during the high-volume scenario. Delays in transferring funds between banks and the exchange caused the holdup.

• SEBI Regulations: The new SEBI regulations, while aiming for greater transparency, might have unintentionally created a bottleneck in the processing flow during high-volume situations.

These factors resulted in a situation where many investors' payments didn't reach the ICCL by the cut-off time, even though they placed orders before the deadline. Consequently, their purchases were processed on June 05, leading to unit allotment based on the higher NAV of that day.

[Read: Top 7 Equity Mutual Funds That Delivered Over 20% CAGR in Modi 2.0]

Impact on Investors: Missed Gains and Potential Losses

Investors who missed out on the lower NAV due to the delay expressed disappointment and frustration on social media platforms. Some even demanded compensation for the potential losses incurred. The situation highlighted the importance of transparency and efficiency in the MF investment process, particularly during periods of high market volatility.

Although market movements are unpredictable, the delay in NAV allotment could have led to potential losses for investors, especially if the market rebounded on June 05, 2024. The situation caused frustration and a sense of unfairness among investors who felt they were not responsible for the technical glitch.

This incident serves as a reminder of the complexities involved in the mutual fund purchase process, particularly during volatile market conditions. While the industry is working on improvements, investors can be better prepared by understanding cut-off times, potential delays, and the importance of a long-term investment horizon.

Do note for long-term investors with a disciplined investment strategy, short-term fluctuations like this may have a lesser impact on overall returns. By staying informed and adopting a strategic approach, investors can navigate market fluctuations and make informed investment decisions.

What Can Investors Do?

While recovering lost gains or receiving compensation might be challenging, here are some steps you can take:

• Review Your Order Confirmation: Gather documentation confirming your order placement before the cut-off time for the June 4th NAV.

• Contact Your Platform: Reach out to the platform you used for your mutual fund investment and inquire about the specific reason for the delay in your transaction.

• Be Aware of Cut-Off Times: Always double-check the cut-off time for same-day NAV allotment before placing your MF order.

• Choose Reliable Platforms: Select platforms with a proven track record of handling high transaction volumes and a commitment to investor communication.

• Plan for Market Volatility: Market crashes can cause system overload. Consider placing MF orders a little earlier than usual during volatile periods.

To summarise...

The June 04, 2024 incident serves as a valuable learning experience for all stakeholders. By implementing the suggested solutions and fostering investor education, the industry can build a more resilient and efficient mutual fund investment ecosystem. This will benefit investors by providing a transparent and reliable platform to navigate market movements and achieve their financial goals.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

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.