Comprehending Sale and Repurchase Price in Mutual Funds

In mutual funds, Sale Price and Repurchase Price are key concepts that determine the price at which investors buy or sell mutual fund units. Here’s a detailed explanation of both terms and how they impact mutual fund transactions.

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Sale Price

Definition: The Sale Price is the price at which investors buy mutual fund units. It represents the cost per unit that an investor needs to pay when subscribing to or switching into a mutual fund scheme.

Key Points:

1. No Entry Load:

   • As per SEBI Circular No. SEBI/IMD/CIR No. 4/168230/09 dated June 30, 2009, entry loads (charges for buying mutual fund units) have been abolished for all mutual fund schemes. This means that the Sale Price is now equivalent to the NAV (Net Asset Value) per unit.

2. New Fund Offer (NFO):

   • During an NFO, the Sale Price is typically set at the face value of the unit as specified in the Scheme Information Document (SID) and Key Information Memorandum (KIM). This face value is usually ₹10, but it can vary based on the scheme.

3. Ongoing Offer Period:

   • After the NFO period, mutual funds reopen for subscriptions and redemptions. During this ongoing offer period, investors buy units at the NAV, meaning the Sale Price per unit is the applicable NAV on the subscription date.

Example:

• If the NAV on the day you invest is ₹20, then your Sale Price per unit will also be ₹20.

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Repurchase/Redemption Price

Definition: The Repurchase Price, also known as the Redemption Price, is the price at which a mutual fund buys back units from investors when they redeem their units or switch them to other schemes/plans within the same mutual fund.

Key Points:

1. Includes Exit Load:

   • The Repurchase Price includes any applicable exit load (a fee charged on the redemption of units). If there is no exit load, the Repurchase Price is equal to the NAV.

2. Calculation of Redemption Price:

   • The Redemption Price is calculated using the formula:

     $\text{Redemption Price}=\text{Applicable NAV}\times (1-\text{Exit Load})$

   Example:

   • If the NAV is ₹10 and the exit load is 2%, then:

     $\text{Redemption Price}=\text{₹}10\times (1-0.02)=\text{₹}10\times 0.98=\text{₹}9.80$

3. Exit Load:

   • Exit loads are charged as a percentage of the NAV at the time of redemption. These are designed to discourage short-term trading and cover the costs associated with the redemption process. AMCs (Asset Management Companies) can modify exit load structures or introduce new exit loads, but any changes are applicable only to future transactions, not to existing units.

4. Regulation on Repurchase Price:

   • As per SEBI regulations, the Repurchase Price for open-ended schemes must not be less than 95% of the NAV. This ensures that investors receive a fair value when redeeming their units.

5. Closed-Ended Schemes:

   • Units of closed-ended schemes cannot be repurchased prematurely. Investors can only sell these units on the stock exchange where they are listed, or they may be repurchased at the end of the scheme’s tenure as per the scheme’s terms.

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Conclusion

Sale Price and Repurchase Price are essential components of mutual fund transactions. The Sale Price represents the cost of acquiring mutual fund units and is typically aligned with the NAV during ongoing periods. The Repurchase Price reflects the amount investors receive when redeeming their units, adjusted for any applicable exit loads. Understanding these concepts helps investors make informed decisions about their mutual fund investments and manage their costs effectively.