Settlement cycles for mutual fund transactions (T+1/T+2/T+3)
Settlement cycles for mutual fund transactions refer to the number of business days within which redemption proceeds or allotment confirmations must be delivered to investors following a transaction. In India, SEBI prescribes separate settlement timelines for different types of mutual fund schemes, with faster settlement for liquid and overnight funds (which invest in very short-duration, highly liquid instruments) and longer timelines for equity and debt funds.
Settlement in mutual funds is primarily relevant to redemptions (the payment of redemption proceeds to the investor’s bank account) and unit allotments (confirmation that purchased units have been credited). Unlike equity market settlement, where a central counterparty (NSE Clearing or ICCL) nets and settles trades, mutual fund settlement occurs directly between the AMC/RTA and the investor’s bank.
SEBI-mandated settlement timelines
Redemption proceeds
| Scheme type | Settlement timeline | Notes |
|---|---|---|
| Liquid funds | T+1 business day | Proceeds credited to bank within one business day of the applicable NAV date |
| Overnight funds | T+1 business day | Same as liquid |
| Equity funds (open-ended) | T+2/T+3 business days | SEBI requirement: within 3–5 business days; industry practice and SEBI target: T+2 to T+3 |
| Debt funds (open-ended, excluding liquid/overnight) | T+2/T+3 business days | Same as equity |
| ELSS funds | T+3 business days (after lock-in completion) | Lock-in per instalment; redemption only after 3-year period |
| Close-ended funds on maturity | As per scheme terms, generally T+3 to T+5 |
Note: “T” refers to the transaction date, the date on which the redemption request is received and the applicable NAV is determined. T+1 means one business day after T.
Unit allotment on subscription
| Scheme type | Allotment timeline |
|---|---|
| Equity / debt / hybrid open-ended | Units allotted and reflected on T day or T+1 (subject to funds realisation) |
| Liquid / overnight | Units allotted on T+1 (consistent with T+1 applicable NAV) |
| NFO (open-ended) | Within 5 business days of NFO closure |
| NFO (close-ended) | Within 5 business days of NFO closure; exchange listing within 15 days |
Instant / same-day redemption for liquid funds
A subset of liquid fund products offer instant redemption facilities up to Rs 50,000 or 90% of the investment value (whichever is lower) per day per scheme per investor. These facilities use IMPS or UPI for near-instantaneous credit to the investor’s bank account, enabling access to funds outside normal banking hours.
Instant redemption is a convenience overlay built by some platforms (e.g., Paytm Money, Groww, Coin by Zerodha) and financed by the platform or AMC; the underlying settlement between the AMC and the investor’s bank still occurs on T+1. The platform fronts the money immediately.
SEBI has defined the maximum instant redemption limit to prevent large outflows from causing fund liquidity stress.
Comparison with equity market settlement
India’s equity markets migrated to T+1 rolling settlement for all exchange-listed securities by January 2023 (phased implementation from November 2021). Mutual fund redemptions operate on different timelines because:
- No secondary market netting: Mutual fund redemptions require the AMC to liquidate portfolio securities or use existing cash to pay redemption proceeds. There is no central counterparty to net flows.
- Banking system lag: Funds transfer from the scheme’s bank account to the investor’s bank account through RTGS/NEFT, which involves bank processing time.
- High-volume queue: On high-redemption days, processing redemptions for thousands of investors takes time.
SEBI’s 2021 reforms
Before 2021, equity fund redemptions were commonly settled in three to five business days. SEBI tightened this via its Master Circular, setting a benchmark of T+2 to T+3 for equity and debt funds. The industry moved to broadly achieve T+2 to T+3 settlement as the norm.
SEBI also mandated that AMCs use the NACH credit system (operated by NPCI) for redemption payouts rather than cheque-based payouts, significantly reducing the last-mile delay between the AMC’s bank debit and the investor’s bank credit.
Implications for investors
- Investors who need rapid access to funds should keep emergency liquidity in liquid or overnight funds (T+1 settlement or instant redemption facilities), not in equity funds.
- Redemption proceeds from equity funds are not available for same-day use; planning a 2–3 business day buffer is prudent.
- For large redemptions (above Rs 2 lakh), the realisation-of-funds requirement on the subscription side (see applicable NAV) also has settlement implications when the proceeds from one fund are being deployed into another.
Related articles
- Applicable NAV and cut-off rules
- Net Asset Value (NAV)
- SIP, Systematic Investment Plan
- New Fund Offer (NFO)
- AMFI
References
- SEBI Master Circular for Mutual Funds (2024), Redemption timelines.
- SEBI Circular on instant redemption facility for liquid funds (various).
- AMFI Operational Guidelines on payment of redemption proceeds.
- NPCI NACH operational guidelines.