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Rounding-off in Mutual Funds : Meaning, Applicability, Calculation

  • Marisha Bhatt
  • Jan 12 2022
  • 5 minutes
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Savings and investment are an important part of our day-to-day exercise. Every person tries to save whatever they can to help them on a rainy day or to meet certain financial goals. These savings get multiplied faster when they are invested in quality investment products that can offer the investor higher returns. Mutual funds are a classic example of such investments.

Meaning of mutual funds

We all have heard this term too often but what are mutual funds exactly?! Mutual funds are a fund that is made by pooling multiple individual stocks or other assets with the aim to generate higher than market returns for the investor. Mutual funds have been around for decades and have become a must in every investor’s investment portfolio.

Meaning of round off in mutual funds

Mutual fund units are bought or sold based on their NAV or the net asset value. This value changes every day based on the value of the underlying securities at the end of the day. So if the investor had to invest Rs. 1,000 for a fund having NAV Rs. 28, the number of units allotted to the investor will be 35.714. Also, based on the number of units, the amount invested would be Rs. 999.992. The balance negligible amount will be with the fund house. Many times investors may get a few paise more or less on account of such decimals. 

Need for rounding off in mutual funds

Earlier, the formula for calculation of NAV for sale and repurchase price was different. Many mutual funds would either adopt the same formula for sale price and repurchase price calculation while many would use a different one for each case. This led to confusion among investors and variations in the amount to be paid or the number of units to be allotted to the investors.

In order to remove any confusion and to streamline the process, SEBI, in the year 2002, mandated that all mutual funds adopt the same method of calculation and can round off the NAV.

Applicability of round off on various types of mutual funds

This rounding up of NAV up to the prescribed number of decimals was further based on the type of mutual fund scheme. 

  • Round off up to 4 decimals

Round of up to 4 decimals is applicable in case of index funds and all types of debt funds like,

  • gilt funds, 
  • liquid or money market mutual fund schemes, 
  • income plans
  • short-term plans
  • fixed maturity plans
  • monthly income plans
  • Round off up to 2 decimals

Round off up to 2 decimals are applicable in the case of equity oriented mutual fund schemes and balanced funds. However, SEBI also provides them with a choice to round off up to 4 decimals if they want to.

Calculation of loads on mutual funds

Loads are the charges levied by the mutual fund houses upon entry or exit of the investor from the mutual fund scheme. In India, entry loads were eliminated long back. Only exit loads are applicable on mutual funds now.

As per the guidelines of SEBI, exit loads are to be charged as a percentage of NAV. The guidelines further state that the exit load is to be added or deducted from the NAV to calculate the sale or repurchase price of the mutual fund transaction.

The above concept is explained through a simple example.

If the exit load is 1% on a NAV of Rs 100,

  • The sale price will be Rs. 101
  • The repurchase price will be Rs. 99

Conclusion

The concept of rounding off was introduced with the aim to benefit the investors and to improve general investor awareness. The mutual fund scheme has to mention the round-off applicable under the offer document.

FAQs

1. Is rounding off applicable on all mutual fund schemes?
A. Yes. As per the SEBI guidelines, the concept of round-off is applicable to all mutual fund schemes.

2. When was the concept of round-off introduced and mandated?
A. The concept of round-off in NAV of mutual funds was introduced and mandated from 31st August 2002.

3. From when was entry load no longer applicable in India?
A. In India, entry load was no longer applicable from August 2009.

4. What is the round-off applicable on balanced funds?
A. Balanced fund can round off the NAV up to 2 decimal points like equity-oriented mutual funds. SEBI further provides that these funds can choose to round off up to 4 decimal points like debt oriented funds if they wish to.

5. Is rounding off the NAV detrimental to investor’s interests?
A. No. Rounding off of NAV was introduced to standardize the calculation of NAV for sale of repurchase of mutual fund units. The amount of round-off is negligible and does not adversely affect the investor. In some cases, the investor may receive more or less amount due to decimal points. This should not be a serious cause of concern for the investors.

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