Does Timing The Net Asset Value Matter?

The performance of a particular scheme of a mutual fund is denoted by its net asset value (NAV). It is also known as the market value of the securities held by the scheme and varies on a day-to-day basis. The NAV of a scheme is based on the market value of the underlying portfolio and thus highly correlated with the market prices. Therefore, in order to clock in that particular day’s NAV, the fund manager needs to be aware of the amount under his management in order to make buying or selling calls in those schemes in accordance with the settlement period and trading times of the markets.

The timings also largely help in ensuring that all classes of investors get the same treatment irrespective of the amount invested. If an investor wishes to invest in a mutual fund on a particular day, he or she can do it via the dematerialisation account if any or directly through an AMC website via a bank account by providing the necessary details. However, just like stocks, mutual funds also have cut-off timings. Depending on the market levels, if an investor wants to take advantage of the NAV on the same day, then the following table shows the cut-off timings for determining the applicable NAV for subscription and redemption of transactions.

As per the Securities and Exchange Board of India (SEBI), effective from February 1, 2021, the applicable NAV in respect of purchase of units of mutual fund scheme shall be subject to realisation and availability of the funds in the bank account of a mutual fund before the applicable cut-off timings for purchase transactions, irrespective of the amount of investment under all the mutual fund schemes. The above rule is already applicable for purchase transactions under liquid funds and overnight funds. For example, lets us look at the following scenarios:

1. Lump sum purchase transaction of ₹100,000 received (time stamped) before cut-off time of 3 pm on Thursday, August 4, 2022. If the funds are received in the mutual fund’s account before cut-off time of 3 pm on August 4, 2022, the investor will be allotted closing NAV of August 4, 2022. However, if the funds are received in the mutual fund’s bank account at say 5 pm on August 4, 2022, i.e. after the cut-off time of 3 pm, the allotment of units will be done as per the NAV of Friday, August 5, 2022. However, if the funds are received in the mutual fund’s bank account at say 4 pm on Friday, August 5, 2022, the units will be allotted at the closing NAV of Monday, August 8, 2022 given that the intermediate days are non-business days. In short, the units are allotted as per the NAV of the business day on which the funds are received into the mutual fund account before the applicable cut-off time.

2. Let us assume that an investor has signed up for SIP transaction of ₹5,000 to be debited on the 10th of every month. Until now, the investor would have been allotted SIP units at the NAV for the 10th of the month assuming the same is a business day irrespective of the date on which the money was received or credited to the mutual fund’s bank account. As per the new rule, the investor would be allotted the SIP units as per the NAV for the 10th only if the money is received or credited to the mutual fund’s bank account before 3 pm on the 10th. Else, the SIP units will be allotted units as per the NAV of the next business day on which funds are received before the cut-off time.

Rolling Return
Rolling return is the annualised average return for the selected period beginning at a given start date and advancing one day sequentially till the last available date. This method provides a more accurate and in-depth picture of a portfolio’s performance as the return is calculated every day for the period under observation rather than being dependent on any specific timeframe.

Nowadays, informed investors are seen hassling for getting the same day NAV while making their investments. They think that timing the markets while investing in mutual funds as well will give them better returns. However, it must be noted that mutual fund NAV doesn’t fluctuate like stock prices. In order to make this point clear, we have calculated the rolling returns for the best performing Mid-Cap fund and the worst performing mid-cap mutual fund on a particular day and compared the changes in their three-year rolling returns with the respective rolling returns of the broader S and P BSE Mid-Cap index. 

We have considered the average rolling return of Edelweiss Mid-Cap Fund, one of the oldest and consistently performing mid-cap funds and that of Quant Mid-Cap Fund, which has not done so well in the past 10 years along with those of the BSE Mid-Cap index. We have taken three instances for observation, one for the period from August 21, 2012 to August 19, 2022, the second or the next day i.e. August 22, 2012 to August 19, 2022 and the third being one where we calculate the average rolling returns for a week from the first day i.e. August 28, 2012 to August 19, 2022. 

After comparison it is clear that the returns for the next day i.e. August 22 are almost the same for the three funds. The only change is in the return for Edelwiess Mid-Cap Fund – a meagre change of 0.01 per cent, which hardly makes any difference. Similarly, in the third table, where we consider returns after a week i.e. August 28, the change is hardly admissible and is in the range of 0.01-0.02 per cent.

Market Performance Scenario
To further clarify, let us consider the days where the Indian markets have outperformed and severely underperformed in the past 10 years. Here specifically for our study we have considered the S&P BSE Mid-Cap index which outperformed the markets by 10.68 per cent on March 23, 2020 after it had plunged by 5.83 per cent on March 13, 2020. Let us compare the average rolling returns for three years for the said entities on these days and consider two scenarios: a) a day before the best and worst day of performance of the index in consideration and b) a day after the best and the worst performance of the index in consideration.

Thus, even if we look at the best performing day of the equity indices and the day after that, the difference in the average rolling return is still in the minimal range of 0.03-0.05 per cent. The above study helps us to understand that no matter what the markets levels are, even on a great market day and the days following that extraordinary event, the value of your NAV does not change much even if you miss investing on the same day and before the cut-off timing. Hence, your investment does not drastically change if you miss entering the markets via mutual fund investment. So, one should avoid rushing into it. This inference is useful for investors who fret over timing the markets. It is also of value for those who are by some reason unable to invest their funds in a premeditated way.

This could be due to some last minute technical error on the execution part on behalf of the bank wherein the cheque does not get passed in due time or insufficient funds or the time taken for the realisation of funds as discussed above. Further, if a genuine emergency makes an investor redeem a certain amount or to postpone or divert the investment for some other purpose, it is no reason to feel disheartened about an opportunity missed. However, this doesn’t apply to the ones who are in the habit of procrastinating their investments and wait for the market levels to drop. Mutual funds’ NAV do not vary drastically and one should start investing as soon as possible with any amount and start reaping the benefits of this beautiful investment product for creating wealth in the long term.

("Investing requires qualities of temperament way more than it requires qualities of intellect.") -Warren Buffett