I have read some complaints and observations from some mutual fund investors on forums like Nairaland about their mutual fund trading orders either not being executed on time, or not executed at prices they had expected. The implication of such complaints or observations is that it looks like investors expect mutual fund trade orders to work like stock investment orders. But they differ.
Unlike stock trading orders where the investor can set the price at which he or she is prepared to trade, mutual funds do not grant investors such luxury or privilege. In stock trading, you can place a market order, which is an order to buy or sell a stock immediately at current market price.
You can as well place a limit order, which is an order to buy or sell at a specific price. Limit orders can go with some additional orders like fill or kill (FOK) meaning that if the trade is not executed at the specified price, it should be killed or considered cancelled. The reason for a fill or kill order is to make sure that a limit order does not remain effective for a considerable period of time.
The opposite of this is a Good till cancelled order, which keeps an order alive, or in effect until such order is expressly cancelled if not executed. Investors wishing to minimize their loss can enter a stop loss order, which is a case where an investor places an order asking a broker to sell when the market price touches a given price.
Mutual funds are not traded with such orders. This is because prices of shares of stock are determined by the forces of demand and supply and are subject to change minute by minute, as new information gets to the stock exchange market but mutual fund prices are determined or calculated once a day.
So, what determines the price at which an investor buys or sell his or her mutual fund investment depends on the NAV on the day he or she places his trade.
However, fund managers are not open 24 hours of the day, therefore, most fund managers have cut off time that govern what NAV to use in executing a mutual fund trade.
An example of a fund manager that has a set cutoff time for mutual fund trades in Nigeria is Stanbic IBTC Asset Management whose cutoff notice I have replicated below;
For open ended mutual funds, investors can buy into the funds on any business day of the year. However, there is no guarantee that such investor will get the NAV of the day that he places the order. The implication of a cutoff time, therefore, is that the NAV you get when you place an order for a mutual fund will depend on the time the fund manager receives the order.
If you submit your order on or before the cut off time, your order will be executed at same day’s NAV. But if the order is placed or received after the cut of time, your trade will be executed at the next day’s NAV. Another importance of cutoff time is to grant the fund manager enough time to process the money transfers relating to the trade.
There is Need for Unification of Cutoff Times
It does not appear that there is a regulatory stipulation on cutoff times for mutual fund transactions in Nigeria, as different fund managers may have different cutoff times. In more advanced markets, there is uniform cutoff timing for applicability of net asset values of mutual funds. This could be a good guide or regulation to implement in Nigeria so that all fund managers will have the same cutoff time.
In that case, the confusion that arises from placing trades at the same time with two fund managers and having them executed at different days’ NAVs will be eliminated.