Indians investing in mutual funds have grown sharply in the last few years. At the end of December 2022, the net assets under management of the mutual fund industry stood at close to Rs 39.9 lakh crore. In what should be good news for investors, from February 1, redemption requests will be settled a day sooner as equity mutual funds are shifting to a T+2 settlement cycle.
So far, mutual funds have followed a T+3 settlement cycle. What this essentially meant is that redemption requests took trading date plus three days for settlement. From February, redemptions will become faster as equity mutual funds move to a T+2, that is, trading date plus two days cycle.
This shift to a shorter settlement cycle has been made possible with equity markets moving to a T+1 (trading date plus one day) settlement cycle from earlier T+2 from Friday. So, if someone buys shares today, he/she would get the shares in the demat account the next day, versus after two days earlier.
“The shortening of the settlement cycle will bring in significant capital efficiencies to the investors and improve risk mitigation for the entire industry,” said Ashishkumar Chauhan, MD and CEO of NSE.
Most major equity markets around the world follow a T+2 settlement cycle. Securities and Exchange Board of India had permitted stock exchanges to introduce T+1 settlement cycle from January 1, 2022 in the equity segment. The first batch of securities transitioned to T+1 settlement on February 25, 2022. Since then, every month a batch of around 500 securities transitioned to the new settlement cycle.
From Friday, all shares, including shares of small and medium enterprises, exchange-traded funds (ETF), infrastructure investment trusts (InvIT), real estate investment trusts (REIT), sovereign gold bonds (SGB) and government and corporate bonds that trade in the equity segment are settled on T+1 basis.
“T+1 settlement cycle for Indian equity markets is a global first. As an industry, we want to pass on the benefit to our mutual fund investors and hence we are proactively adopting a T+2 redemption payment cycle for equity funds,” said A. Balasubramanian, MD and CEO of Aditya Birla Sun Life AMC and Chairman, AMFI.
Market participants say moving to a shorter settlement cycle is a step in the right direction.
“Very positive steps by regulators to give quick and easy liquidity, which can be used to plan to reinvest or meet any obligations in a more timebound manner,” said Akhil Chaturvedi, Chief Business Officer at Motilal Oswal AMC.
