Retail investors lose out on benefits from the June 4 market meltdown due to a delay in mutual fund allocation

Many investors have claimed that following the June 4 meltdown of the Indian equities markets, delays in assigning mutual fund units prevented them from potentially profiting from purchasing at reduced prices. It was expected that on that day, investment platforms handled close to 500,000 mutual fund transactions.

On June 4, the NSE Nifty and BSE Sensex, the major Indian indexes, fell by about six percent each.

Many mutual fund investors were given units based on the pricing of the next day, which was an unpleasant awakening for those who intended to profit from the market fall on June 4, the day of the election results, by value-buying at lower levels.

Investors in mutual funds receive their units at the Net Asset Value (NAV) of the day the funds are received into their accounts prior to the relevant cut-off time.

As an example, let's imagine that on June 4th, investor A made an investment of Rs 1 lakh prior to the regulatory deadline of 3 pm. The investor receives the closing NAV on June 4 if the funds are deposited into the mutual fund account by the deadline of 3 p.m. on the same day. On the other hand, unit allocation occurs at the NAV of June 5 if the monies are received in the mutual fund's bank account, say, at 4 p.m. on June 4.

The benchmark Indian indexes, the NSE Nifty and the BSE Sensex, fell by around six percent each on June 4 after the indications from poll results that the Bharatiya Janata Party (BJP) would not be able to secure an absolute majority in the Lok Sabha elections on its own.

Before the deadline of 3 p.m. on June 4, hundreds of investors invested lump sum sums in an attempt to profit from the market fall. On social networking sites like X (previously Twitter), however, a number of investors who used platforms like Groww, Zerodha, and ETMoney expressed dissatisfaction, claiming that their mutual fund units were assigned based on June 5 prices—a day on which the markets had rebounded by over 3 percent.

Investors claimed they were cheated out of possible profits by the one-day delay in assigning mutual fund units.

The operation of the payment system

Units in mutual funds are distributed according to the timing of the money's arrival to AMCs' accounts. The money path must pass via sponsor bank, nodal bank, and ultimately the AMC's account in order for it to occur.

Ever since the Securities and Exchange Board of India (SEBI) implemented the pooling of funds method in 2022, the money that is taken out of an investor's bank account is credited to the clearing company (also known as the payment settlement exchange) bank account. But the exchanges will not know which customer has invested how much money until they get the money.

Here, the MIS (Management Information System) report—a file containing instructions—is uploaded by payment aggregators to assist exchanges in matching a specific order with a payment. The National Stock Exchange (NSE) and the BSE have internally set a 2:30 pm deadline for processing payments for equity funds.

What went incorrectly?

On June 4, the Indian financial markets saw very high trading volumes. Industry insiders claim that investment platforms managed record-breaking value-based investments.

A representative from one of the investing platforms informed Moneycontrol that on June 4, the amount of money invested on their platform via lump sum was around seven times more than what they typically handled. "It was not just the volume that was high; it was also the value," he said.

"It makes sense that the banks were unable to transfer the funds promptly into the payment gateway accounts and from those accounts to the corresponding mutual fund companies," the speaker said.

A Groww representative said that on June 4, several mutual fund clients saw delayed unit distribution as a result of delayed money transfers between banks, exchanges, and asset management firms (AMCs).

Money for MF investment orders was sent to the exchange by brokers or MF distributors prior to SEBI's restrictions in July 2022. Following the implementation of SEBI's new restrictions on MF non-pool, payments are now sent straight to the exchange, bypassing the intermediary broker/distributor, and subsequently to AMCs. The representative said, "To address these issues and promote a better customer experience, we are collaborating closely with ecosystem partners."

According to a different source at one of the investment platforms, a big private bank was having problems at the back end of their business, which caused system congestion and delayed transaction processing.

According to industry insiders, between 95 and 98 percent of mutual fund trades occurred on June 4 without any issues. That would still suggest that at least 10,000 transactions had problems, given that investing platforms handle close to 500,000 mutual fund transactions per day.

How can this be resolved?

Investment platforms claim that they are blind to subsequent payment procedures once the invested funds leave their system. "On condition of anonymity, we only find out once the AMC allocates the units," said an official at an investing platform.

The money is gathered by the bank, which then combines it all and sends it to the payment settlement exchange. After that, the exchange will transfer the funds to the appropriate AMCs in phases. The AMC will assign units after realization, and this will appear on our site. On June 4, there was a blockage in this pipeline somewhere," the source stated.

The registrar and transfer agency (RTA) KFin Technologies' chief executive officer and managing director, Sreekanth Nadella, stated that "the amount of time being taken within the banking channels is coming down gradually." But an AMC, RTA, or distributor are limited in what they can do in this regard. For the money to reach the AMC, it may take one, two, three, or even half a day, depending on the bank you choose and the day of the transaction. While UPI transfers occur instantaneously, not all financial transactions are completed that fast.

Large lump sum investments are inappropriate for UPI due to its Rs 2 lakh transaction limit for mutual fund investments. Most significant mutual fund investments are still made via net banking.

Investor remedy

As per SEBI rules, the defaulting party has the liability of providing any compensation to investors in the event of a NAV delay.

An investing platform official said that they are discussing what transpired and how to settle this dispute amicably with authorities. Payment gateways and investment platforms are working to determine how to prevent a recurrence of this problem.

Investors who feel mistreated have two options: they may register complaints against SEBI-regulated businesses online via the SEBI Complaints Redress System (SCORES) and with their individual investment platforms.