SEBI announces changes in cut-off timings for overnight mutual fund

The market regulator, Securities and Exchange Board of India (Sebi), has announced the change in cut-off timings to determine applicable NAV with respect to repurchase of units in overnight fund schemes.

This is in order to operationalize the upstreaming of clients’ funds in the form of pledge of units of Mutual Fund Overnight Schemes (MFOS). The new timings will be effective from June 1.

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The following cut-off timings shall be observed by AMCs with respect to repurchase of units in liquid fund and overnight fund schemes and plans and the following NAVs shall be applied for such repurchase

1. Where the application is received up to 3.00 PM, the closing NAV of day immediately preceding the next business day
2. Where the application is received after 3.00 PM, the closing NAV of the next business day.

In case application is received through online mode, the cut-off timing of 7 PM shall be applicable for overnight fund schemes.

Investment in MFOS, which is a new avenue made available to SBs/ CMs to deploy client funds, ensures minimal risk transformation of client funds (that are withdrawable on demand) available with SBs/ CMs because of overnight tenure and exposure to only risk - free government securities, according to a circular by Sebi in January.

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

“The overnight schemes receive money invested in securities with 1 day maturity on next working day. For meeting redemption requests, the overnight schemes don’t have to make any sale transaction before market hours,” according to the Sebi circular in January.

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Instead the overnight schemes, based on redemption requests, may decide not to reinvest the maturity proceeds to be received on T+1 settlement date. 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. 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.

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