On April 22, 2023, the Securities and Exchange Board of India (SEBI) announced significant updates regarding the cut-off timings for determining the net asset value (NAV) for repurchases and redemptions in Mutual Fund Overnight Schemes (MFOS). This initiative aims to streamline the process for stock brokers and clearing members, providing them with additional time to manage their clients’ investments effectively.

New Cut-off Timings for MFOS

Under the new guidelines, if applications are submitted before 3 PM, the NAV from the previous business day will apply. Conversely, any requests made after this cut-off will utilize the NAV from the following business day. Importantly, online submissions will have an extended cut-off time of 7 PM for these overnight schemes, as specified in SEBI’s recent circular.

• Before 3 PM: NAV from the previous business day
• After 3 PM: NAV from the next business day
• Online Applications: 7 PM cut-off for overnight schemes

These changes will take effect on June 1, 2023, offering stock brokers and clearing members a more flexible framework for executing redemption requests.

Benefits of Mutual Fund Overnight Schemes

Investing in MFOS presents a low-risk opportunity for stock brokers and clearing members to deploy client funds. These schemes primarily invest in government securities, ensuring minimal risk due to their overnight tenure. The structure of MFOS allows for:

• Risk-free investments: Funds are exclusively placed in government bond markets and overnight Tri-party Repo Dealing and Settlement (TREPS).
• Mandatory demat form: All MFOS units must be held in demat format and pledged with a clearing corporation at all times.

SEBI highlighted the importance of these overnight schemes in its consultation paper earlier this year. It noted that the funds collected are typically invested in securities with a one-day maturity, ensuring that redemption requests can be met without requiring prior market transactions.

Redemption Process Simplified

The newly established cut-off timings aim to enhance the efficiency of the redemption process. According to SEBI:

• Overnight schemes do not need to execute sale transactions before market hours to meet redemption requests.
• Funds from redemption requests received on the transaction day (T-day) will not be reinvested on the following day (T+1) but will instead be used for client payouts.

This approach ensures that the timing of redemption requests—whether by 3 PM or 7 PM—will not adversely affect the funds’ valuation or their ability to process client redemptions.

As investors and brokers navigate these changes, the updated guidelines promise to create a more streamlined and efficient experience in managing overnight mutual fund investments.