When to Use Market Orders in Mutual Fund Investments

What Is a Market Order in Mutual Funds?

Market order in mutual funds refers to making an order to buy or sell units at the applicable net asset value that is computed at the end of every trading day. In contrast to shares, where market orders are made immediately and at the best price possible, mutual fund market orders are made at the end-of-day NAV. This is to ensure that all investors who make orders on the same day get the same price.

How Market Orders Are Processed

When you place a market order for a mutual fund, it is not executed immediately. Instead, it is recorded and processed after the stock market closes. The fund house calculates the NAV using the closing prices of all securities in the portfolio.

When you place your order earlier than the daily cut-off time, your order is going to be calculated on the same day's NAV. In the event that it is received after the cut-off, it will be computed with the following working day NAV. This system is known as forward pricing and ensures fairness.

Difference Between Market Orders and Other Orders

Market orders are straightforward and only aim at rapid execution. They are not fixed to a certain price and are executed at the most appropriate market price. Limit orders enable the investor to specify a particular price they wish to purchase or sell, which provides the investor with greater control over the trading price. Understanding this difference helps investors avoid confusion when placing orders online.

In mutual funds, most transactions work like market orders because investors usually accept the NAV determined at the end of the trading day. Some online platforms may show features similar to limit orders, but the final price is still based on NAV.

Advantages of Using Market Orders

Market orders in mutual funds offer several advantages: 

• Simplicity: The order can be placed easily without the need to track or analyse price movements.
• Guaranteed Execution: Orders are accepted provided they comply with the cut-off policies.
• Fair Pricing: All the investors are given the same NAV on the day.
• Time-Saving: There is no need to monitor the market movements continuously.

Risks and Limitations of Market Orders

Despite their convenience, the market orders have some limitations. The last price might be more than what you were expecting, or it could be less because you do not know the NAV when the order is issued. NAV may fluctuate by the day's end under volatile market conditions. This can affect price-sensitive short-term investors. Also, market orders do not offer entry or exit level control. Thus, market orders are supposed to be employed by the investors as long-term investments and not as short-term trades.

When Should Investors Use Market Orders?

Market orders are suitable for long-term investors. They are effective in a Systematic Investment Plan (SIP), monthly investments, and objective-based planning.

Market orders are a viable option when you are interested in wealth creation over time rather than short-term market movements. However, seasoned investors may choose alternative strategies when managing large or short-term investments.