Mutual fund investors miss bull rally because of technical glitch

Hundreds of thousands of mutual fund investors may have missed out on the stock market rally in the past 10 days, either fully or partly, as glitches at the National Payments Corporation of India (NPCI)—which enables digital payments and settlements—disrupted transactions.

NPCI upgraded its automated payment system on January 31 but problems with implementation resulted in investors not receiving the units they purchased on time, said people aware of the matter. Investors are worried this means they’ve missed out on the post-budget surge in stocks.

Mutual fund industry officials said investors, who bought units through online platforms or digital gateways, have complained that money has been deducted from accounts but units have been received with a delay or not at all.


What has aggravated the problem are Sebi’s new mutual fund rules. These require investors’ money should reach mutual funds before units are allotted against buy orders of over Rs 2 lakh. At least 500,000-700,000 transactions could have been hit, according to unofficial estimates. This could not be independently verified.

An NPCI spokesperson acknowledged there had been glitches but said that these had been resolved.

“We upgraded the NACH (National Automated Clearing House) system 31st Jan, and we faced some issues (some delays) in the next one or two days in which all the issues were ironed out,” the person said in an email. “Last few days, we have seen a smooth processing on our NACH system.”

An NACH mandate automatically deducts money from investors’ bank accounts and transfers it to the chosen mutual fund scheme. Monthly payments are deducted based on one-time consent or standing instructions. These include equated monthly installments (EMIs), mutual fund systematic investment plans (SIPs) and insurance premiums.

Mutual fund executives said the problems didn’t appear to have been sorted out in relation to several transactions as of Monday night. Disgruntled investors are seeking compensation from fund houses for not getting unit allotments on time, said the chief executive officer of a mutual fund.

“Unless the fund does not receive the money, it’s not possible for us to allot the units,” the CEO said.

An executive at a domestic payment gateway firm said most mutual funds did not stop accepting payments either, clogging the system further.

Critically, since the February 1 budget, the Sensex and Nifty have gained 9-10%, which could have sparked a rush of flows into equity mutual funds. The period of the outage—from January 31 to February 8—also coincided with paydays and led to a pile up of funds debited from accounts but not processed by beneficiaries. That meant a backlog at payment gateways.

“The clogging of NPCI’s NACH rails has led to issues related to reconciliation for payment gateways processing transactions from the bank accounts of retail investors to the bank accounts of the AMCs,” said a senior official at a payments company. “Lakhs of auto-mandate transactions failed, but for MF investors unfortunately, Sebi’s new rules also kicked in from February 1, which exacerbated the issue as customers, despite making payments, weren’t allocated assets.”

Typically, multiple entities are involved in the payment chain—the client’s bank, the mutual fund and the payment gateway, which uses a settlement account similar to an escrow account to store the money. NPCI provides the avenue for most of India’s retail payment channels such as Unified Payments Interface (UPI), Immediate Payment Service (IMPS) and NACH.

Once the money leaves the consumer's bank account, it gets stored in the payment gateway’s nodal account for clearance with the merchant, which happens once a day. PayU, CCAvenues, BillDesk and RazorPay are among the leading gateway services in India.

“While these transactions were processed in batches earlier with room for delayed settlements, Sebi’s new rules allow for allocation of assets only once the fund leaves the bank settlement account and hits the AMC’s bank account,” said a person source with knowledge of the matter. “The glitch at NPCI’s system prevented these transactions from going through leading to a pile up at PGs (payment gateways) of mutual funds and intermediary services as well.”