If Indian Stock market is on a rampage on the positive side in a single day, it may not be useful for a small investor. After unprecedented hit of upper circuit by SENSEX and NIFTY indices yesterday (18.05.09), the mutual fund industry has declared a non-business day on 18.05.09. Fund houses will not be processing any requests for redemption or fresh purchases based on net asset value as on 18.05.09.
The Mutual funds offer document allows them to declare a non-transaction day or a non-business day under abnormal circumstances perhaps like 18.05.09. Association of the Mutual Fund Industry (AMFI) in India has told the fund houses to declare 18.05.09 as non business day.
The Net Asset Value (NAV) is the value of each share of a mutual fund. The NAV of all the equity fund houses, of all the equity schemes is expected to increase because of the surge in the markets. Now no redemption or fresh purchases can be made based on NAV as on 18.05.09, because it is an unrealistic price. So if an investor made a fresh purchase on 18.5.09, he will not be able to do on NAV as on 18.05.09 and it will be done only on NAV as on 19.05.09. Also if he had to redeem the money it will not be done on NAV as on 18.05.09. So that means if his NAV as on 17.05.09 was Rs 8 and as on 18.05.09 it surged up to Rs 9, he will not be able to book that profit.
But this move is questionable in view of the fact that when SENSEX and NIFTY indices hit the lower circuit last year, Mutual Fund Industry did not take any action to declare that day as a non-business day as the same analogy of unrealistic price applies to lower circuit also.