Sebi Overhauls Mutual Fund Rules With Net Settlement Framework To Boost Liquidity And Returns

Securities and Exchange Board of India (Sebi) has introduced a framework for the net settlement of funds for transactions executed by mutual fund schemes in the cash market segment on November 6, 2026.

The new framework is set to allow mutual fund houses to offset fund pay-in and pay-out obligations for cash trades within the same scheme and settlement cycle rather than paying for each leg separately. According to a circular issued by Sebi, the new provisions will come into force from April 1, 2027.

The market regulator explained the reason behind introducing the new mechanism and highlighted its intention to improve liquidity management.

"With a view to enhance operational efficiency, reduce temporary funding requirements and improve settlement efficiency for mutual fund schemes, it has been decided to permit net settlement of funds, at the level of an individual mutual fund scheme, for outright transactions undertaken in the cash segment of stock exchanges, subject to the conditions specified in this circular," Sebi said.

What Is The Net Settlement Framework

Under existing settlement norms for mutual fund houses, institutional investors are not allowed to engage in ‘day trading’. Their cash market trades have to mandatorily be delivery-backed and settled on a gross fund basis at the custodian or client level.

The new net settlement framework changes this approach and allows fund netting at the individual scheme level. Thus, fund houses will no longer need to mobilise full gross cash for every stock they purchase if they are also receiving funds from a sale in the same scheme on that day.

The framework defines a transaction strictly as either a purchase or a sale, but not both, in a particular security during the same settlement cycle. This in turn ensures that day trading remains excluded from the netting benefit. So if a mutual fund scheme records both buy and sell trades in the same security within the same cycle, these trades are classified as non-outright and will have to be settled on a gross basis.

Additionally, Sebi’s new rules stipulate that netting is permitted solely within the same mutual fund scheme and cannot be carried across different schemes or portfolios. This ensures that one scheme's cash proceeds from the sale of equities cannot be used to fund another scheme's purchases. However, Sebi has mentioned that securities settlement will continue on a gross delivery basis, and statutory levies such as the Securities Transaction Tax (STT) and stamp duty will remain delivery-based. Highlighting the integrity of trade obligations, the Sebi reiterated that underlying delivery conditions stay intact.

"The proposed netting shall not alter the delivery-backed nature of institutional trades in the cash market," Sebi said.

How Will Mutual Fund Investors Be Impacted

For retail and institutional mutual fund unitholders, the introduction of fund netting brings some potential operational advantages. One of the key benefits is a significant reduction in the temporary cash drag experienced by funds.

Under the gross settlement regime, asset management companies had to maintain idle cash buffers or draw on short-term bank borrowing lines to fulfil daytime pay-in obligations before sale proceeds arrived.

However, since the new framework frees up liquidity which would otherwise sit idle to service gross obligations, fund managers will be able to deploy capital more effectively and keep more money invested in active assets.

Additionally, lesser dependence on short-term borrowing facilities can potentially reduce financing and overdraft costs for schemes. Since lower operational expenses directly protect scheme returns, unit-holders are expected to gain from enhanced net asset value compounding over time.

Sebi has also mandated asset management companies, custodians, and trustees to verify that netting does not compromise scheme accounting, allocation mandates, or unit-holder rights.

"Trustees shall review the implementation of this framework and ensure that the same is in the interest of unit-holders," Sebi said.