How SEBI’s Goal of Instant Settlement in Stock Market May Benefit Mutual Fund Investors
Divya Grover
Jul 25, 2023 / Reading Time: Approx. 4 mins
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When investors redeem their mutual fund units, the money is not instantly transferred to investor's bank account. The process can take 3-4 working days, in case of equity mutual funds, to be successfully completed. However, with recent changes by SEBI, the redemption cycle has shortened and is expected to become even shorter in the future. Read on to know how...
In a recent press conference, SEBI Chairperson Madhabi Puri Buch announced that the capital market regulator is working on instantaneous settlement of trades on stock exchanges. Ms Buch stated that SEBI is engaging with the ecosystem and deploying technology to make this possible in the near future. Here is what SEBI Chairperson had to say on instant settlement of trades...
"Our markets moved from T+2 to T+1 but the technology stack that we have makes it possible to bring in a mechanism wherein trades can be settled instantaneously with entities getting money and the securities. We believe that in the cash equity segment where T+1 exists, instant settlement can be done."
Notably, the Indian equity market moved to a T+1 settlement cycle for all its stocks in January this year, thereby becoming the first major global economy to do so. This means that all stock trades are now settled one day after the date of trade instead of an earlier cycle of two days. Do note that the transaction takes a day longer in case of mutual fund units.
[Read: The Impact of T+1 Settlement Applicable to Stocks on Your Equity Mutual Funds]
[Read: How Will the 'T+1 Rolling Settlement' Impact Equity Market and Mutual Funds]
Since equity mutual funds invest predominantly in stocks, the redemption cycle for such schemes also moved to a shorter T+2 settlement from February 2023. In other words, the redemption proceeds are transferred to the registered bank account of the investor within two days of completion of the transaction. This has helped in making funds available to investors a day sooner.
According to SEBI's estimates, the reduction in the mutual fund redemption timeline has resulted in gains of Rs 230 crore, going by an analysis of redemptions worth Rs 24 lakh crore in equity and hybrid mutual fund schemes.
When the equity market moves to the instant settlement of stock trades, as envisioned by the SEBI Chief, mutual funds may also move to a shorter T+1 redemption of units. So, the sale proceeds will be transferred to the bank account of investors within a day of raising redemption request. Thus, a shift to instant settlement in the stock market will also benefit mutual fund investors as fund houses will pass on the benefit of a shorter settlement cycle.
[Read: Sensex at All-time High: Is It Time to Sell Your Equity Mutual Funds?]
How the applicable NAV is determined
The applicable net asset value (NAV) for the redemption of mutual fund units is as follows:
| Where the redemption transaction is received on any Business Day at the official points of acceptance of transactions upto 3.00 p.m. |
NAV of the same business day will be applicable. |
| Where the redemption transaction is received after 3.00 p.m. |
NAV of the next business day will be applicable. |
Apart from a faster settlement for mutual fund transaction, SEBI is also looking to strengthen the rules governing corporate disclosures related to insider trading regulations. Furthermore, Ms Buch reiterated that SEBI will soon come out with a consultation paper on 'Finfluencers'.
All these measures can result in better transparency, which in turn will benefit investors as they will have access to enhanced information, thereby helping them take informed investment decisions.
DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.