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Investments less than Rs 2 lakh are given the net asset value (NAV) of the day on which the application is submitted. Therefore, investors often divide lump sum investments into smaller amounts of less than Rs 2 lakh per application form. This helps them get the NAV of the debt scheme on the day of submitting the application, rather than the NAV for the day on which their money is transferred to the fund house, as is the case for investments of more than Rs 2 lakh.
Now, Amfi has asked fund houses to follow a uniform process for aggregating such split transactions, according to a recent circular, of which Business Standard has a copy.
The industry body has told mutual funds for deciding the NAV for amounts lower than Rs 2 lakh, they should club investments through multiple applications in debt funds by an individual or an entity. The aggregation would be carried out on the basis of the investor’s permanent account number (PAN), according to the latest Amfi circular. This means investments into a debt fund wouldn’t be based on the number of application forms, but the PAN.
“After deliberations, the Amfi operations and compliance committee…felt the need for a uniform practice for aggregating split transactions across AMCs (asset management companies). It has recommended a uniform process…to be followed by AMCs, with effect from March 4,” Amfi said.
The latest circular would apply to all transactions received on the same day. It would also apply to transactions at the option level — investments across dividend, growth and direct schemes of a fund would be lumped together. However, certain transactions such as switches and systematic investment plans would be excluded.
The practice of dividing lump sum investments into smaller amounts is more prevalent among rich investors, rather than institutions, which invest crores in debt products.
Currently, suppose an investor plans to invest Rs 3 lakh in a debt fund, he gives three applications of Rs 1 lakh each on a Friday. Since the three applications are each below the Rs 2-lakh limit, they all get Friday’s NAV. By splitting the amount, the person gets the NAV for Saturday and Sunday, even before his money has reached the fund. Some investors redeem their investments on Monday, thus securing the NAV for Saturday and Sunday without the application money even leaving their bank accounts.
“This should not have been happening in the first place…it is unfair…for that particular day, he is eating into the returns of other unitholders,” said Dhirendra Kumar, chief executive officer of fund tracker, Value Research.
Through circulars in 2008 and 2010, the Securities and Exchange Board of India had directed AMCs the NAV of the day on which the funds came through, rather than when the application was made, be applied. This was applicable on non-liquid fund debt investments of at least Rs 1 crore. Through a circular dated September 13, 2012, this limit was reduced to Rs 2 lakh.
Akshay Gupta, managing director and chief executive of Peerless Funds Management Company, said cases of taking advantage of the loophole were few and isolated. “This would be happening once in a while. It is not an industry-wide phenomenon,” he said.
HOW IT WAS DONE:
- Investment below Rs 2 lakh gets NAV of application date (and thus higher returns)
- Some entities would split their transactions so that it wouldn’t cross the Rs 2 lakh limit
- Cheques for investment amount could take a few days to clear
- Investors would get benefit of returns even before they put their money into the fund
- Club investments from the same entity on the basis of PAN Card
- Cover all investments made on the same day
- Apply across dividend, growth and direct options
- Exclude certain transactions such as switches and systematic investment plans
