Mutual fund net asset values (NAVs) were significantly distorted on Monday due to the closing auction session (CAS) framework implementation. According to reports from Business Standard, MF investments and redemptions were processed at elevated NAVs calculated using closing prices of underlying stocks with higher trading volumes, primarily the NSE. The NAVs got inflated to the extent of the last-minute surge in select stocks that moved to the new CAS framework, creating an anomaly in fund pricing. As per latest reports, the pricing anomaly has spilled over into mutual fund schemes' net asset values, producing winners and losers among investors who transacted over the past two days. The sharp jump in the Nifty's official close finished nearly 200 points above its level at 3:15 pm, with several heavyweight stocks settling significantly higher during the closing auction. The benchmark also closed above corresponding futures prices, an unusual divergence that several brokers attributed to limited participation in the auction.
The market showed strong performance during the CAS session, with the Nifty 50 rising 0.82% from its 3:15 pm level to close. As reported by Business Standard, the Nifty 100 and Nifty 500 benchmarks gained 0.76% and 0.59% respectively, while the Nifty Midcap 150 advanced 0.36%. The Nifty Smallcap 250 remained largely unchanged as most constituents are not part of the closing auction framework, which currently covers only stocks with listed futures and options contracts. On Tuesday, too, a significant uptick was witnessed in these indices after 3:15 pm, until close, with another sharp jump during the closing auction keeping NSE closing prices elevated.
The pricing anomaly created distinct winners and losers among investors based on their transaction timing. According to Business Standard, investors who bought into largecap-oriented schemes before Monday's 3 pm cutoff were allotted units at inflated NAVs, while those who submitted redemption requests before the cutoff benefited from the elevated valuations. Tuesday's gap-down opening unwound much of Monday's late-session surge, but another sharp jump during the closing auction prevented the full impact of the earlier excess from being reflected in fund NAVs. As a result, investors who subscribed on Monday have yet to absorb the full mark-to-market loss, with subscriptions and redemptions placed on Tuesday also being processed at elevated NAVs. Market participants emphasise that although such deviations may prove temporary, investors could end up buying or selling units at distorted prices, which will leave them with more or less number of units than they would have in the event of a broad-based price discovery process. The distortion may vanish when the market re-opens for trade the next morning, but the purchases and sales would have happened at previous day's prices that may appear distorted, in hindsight.
Despite the pricing distortion, index fund categories continued to attract investor interest. According to Business Standard, Nifty 50 index funds, the largest category with assets under management of around ₹88,000 crore, recorded a net inflow of about ₹42 crore on Monday. The net inflow data excludes a couple of schemes, including the largest scheme — Nippon India Nifty 50 Plan — as their latest AUM data had not been updated till press time. The impact on actively managed funds varied with portfolio composition, with schemes holding larger stakes in stocks such as Titan, Asian Paints, Axis Bank and Bajaj Finserv experiencing larger NAV uplifts than their benchmark indices. Under the new auction mechanism, closing prices are discovered through an auction instead of the previous 30-minute average method, making them more reflective of actual demand and supply. Funds tracking the Nifty 50, such as UTI Nifty 50 Index Fund, HDFC Index Fund Nifty 50 Plan, ICICI Prudential Nifty 50 Index Fund, SBI Nifty Index Fund and Nippon India Index Fund Nifty 50 Plan, are likely to see the direct impact because they hold the same large-cap stocks affected by the auction process.
The introduction of the Closing Auction Session (CAS) was made by SEBI to enhance price discovery, harmonize the Indian markets with international practices, and allow the implementation of benchmarks for execution of passive funds. As per the regulatory framework, investors receive the same day's NAV only if subscription funds are credited to the asset management company's bank account before 3:00 pm. Redemption requests must also reach the fund house within the prescribed cut-off time to qualify for that day's NAV. Requests received later are processed using the next business day's NAV. Fund house CEOs told Business Standard that Monday's subscriptions and redemptions would be processed at applicable day-end NAVs, following the prevailing framework. Industry participants said the existing framework assumes that official closing prices accurately represent market value, noting that the system functions efficiently when auction participation is broad, but temporary distortions may arise if trading volumes remain limited during the closing session. Several fund executives cautioned against drawing conclusions from a single trading day, noting that Monday marked the first session under the new framework and participation is expected to improve over time. However, fund houses and distributors say Monday's sharp divergence in the official close has raised questions over whether a thin auction could temporarily affect the price at which investors buy and redeem mutual fund units. The new mechanism aims to make closing prices more transparent and reflect actual demand and supply, with the auction-based approach designed to reduce distortion and improve valuation accuracy.
