SEBI Proposes Net Settlement for Mutual Funds: What Could Change for Investors?
SEBI’s proposal may improve mutual fund operations and reduce funding requirements, but it does not automatically guarantee higher returns for investors.
The Securities and Exchange Board of India (SEBI) has proposed allowing mutual fund schemes to settle eligible cash-market transactions on a net basis.
Published for public consultation on 3 September 2026, the proposal aims to reduce the amount of money mutual funds need to arrange when buying and selling securities within the same settlement cycle. It could also make trade settlement more efficient for asset management companies.
However, investors must understand the distinction between better operational efficiency and better investment performance. The proposed change may improve how trades are settled behind the scenes, but returns will continue to depend primarily on portfolio selection, market movements, costs and the fund manager’s decisions.
What Has SEBI Proposed?
SEBI has proposed permitting mutual fund schemes to use net settlement of funds for eligible transactions undertaken in the equity cash market.
Under the existing system, buy and sell obligations may need to be settled separately. This can require a mutual fund scheme to arrange enough money to meet its purchase obligations even when it expects to receive proceeds from sales settling during the same cycle.
Under net settlement, eligible purchase obligations and sale proceeds could be offset against each other. The mutual fund would then pay or receive only the resulting net amount.
SEBI has published the proposal as a consultation paper, which means it is not yet a final rule. The framework may be revised after feedback from market participants. SEBI consultation paper
What Does Net Settlement Mean?
Consider a simplified example:
A mutual fund scheme has the following obligations on a settlement date:
- Shares purchased: ₹100 crore
- Shares sold: ₹75 crore
Under separate or gross fund settlement, the scheme may need to arrange ₹100 crore for its purchases while separately awaiting the ₹75 crore sale proceeds.
With net settlement, the eligible obligations may be offset:
₹100 crore purchases − ₹75 crore sales = ₹25 crore net payment
The scheme may therefore need to arrange only ₹25 crore instead of temporarily funding the full ₹100 crore purchase obligation.
This is a simplified illustration. The actual framework will depend on the eligibility conditions, exclusions and operational safeguards included in SEBI’s final rules.
How Do Mutual Funds Currently Settle Cash-Market Trades?
Mutual funds regularly buy and sell shares while managing portfolios. Such transactions may arise because of:
- New investments or redemptions
- Portfolio rebalancing
- Changes in market outlook
- Index reconstitution
- Corporate actions
- Adjustments required to maintain the scheme’s stated investment mandate
Under a gross or separate settlement structure, purchase obligations and sale proceeds are handled independently. Therefore, a scheme may temporarily require substantial liquidity even when its net market exposure changes only modestly.
This becomes particularly relevant when a fund buys and sells large values of securities on the same settlement date.
SEBI’s proposal seeks to address this temporary funding mismatch by allowing eligible cash-market obligations to be settled on a net basis. A similar facility has already been permitted for foreign portfolio investors, and the regulator is now considering extending it to domestic mutual fund schemes. Reuters
Why Do Lower Funding Requirements Matter?
1. Less money may remain temporarily tied up
A fund may no longer need to arrange the entire gross purchase amount when eligible sale proceeds are available within the same settlement cycle.
2. Liquidity management could become more efficient
Fund managers must maintain sufficient liquidity for portfolio transactions and investor redemptions. Reducing temporary settlement requirements may help schemes manage that liquidity more efficiently.
3. Operational pressure may decline
Large-scale portfolio adjustments can generate several purchase and sale obligations simultaneously. Netting could simplify the amount of money that ultimately needs to move through the settlement system.
4. Short-term borrowing needs could reduce
In some circumstances, funds may use permitted borrowing facilities to manage temporary liquidity mismatches. If net settlement reduces those mismatches, it could potentially lower the need for such arrangements and their associated costs.
The exact benefit would vary across schemes. A fund making few offsetting trades may see limited impact, while a high-turnover, passive or frequently rebalanced portfolio may experience a more noticeable operational benefit.
Could Mutual Fund Investors See a Direct Benefit?
The most immediate benefits would likely arise at the fund-operation level, not directly in an investor’s account.
Investors may benefit indirectly if the final framework helps schemes:
- Manage cash more efficiently
- Reduce temporary funding pressure
- Lower avoidable operational friction
- Execute large portfolio rebalances more smoothly
Nevertheless, investors should not interpret the proposal as a promise of higher returns or an immediate reduction in a scheme’s expense ratio.
Any financial benefit reaching investors would depend on several factors, including how frequently the fund uses the facility, the value of eligible transactions, implementation costs and the scheme’s existing liquidity-management practices.
Will Net Settlement Increase Mutual Fund Returns?
Not automatically.
Mutual fund performance will continue to depend on:
- The securities held by the scheme
- Asset allocation
- Fund-management decisions
- Market and interest-rate movements
- Credit and liquidity risks
- Portfolio turnover
- Scheme expenses
- The investor’s entry and exit timing
Settlement efficiency is only one part of fund operations. Even if it reduces certain costs or funding needs, it cannot protect a portfolio from poor investment decisions or adverse market conditions.
The appropriate conclusion is that net settlement could improve operational efficiency, not that it will necessarily improve investment returns.
What Is Likely to Remain Unchanged for Investors?
If SEBI adopts the proposal, the fundamental experience of holding a mutual fund is unlikely to change.
Investors would still:
- Invest or redeem through the usual channels
- Receive units according to applicable rules and timelines
- See portfolio values reflected through the scheme’s NAV
- Remain exposed to the scheme’s underlying market risks
- Pay expenses according to the scheme’s disclosed expense structure
- Need to select funds based on goals, time horizon and risk capacity
The proposal concerns how mutual fund schemes settle eligible market transactions. It does not change the investment objective, asset allocation or risk profile of an individual scheme.
What Should Mutual Fund Investors Focus On?
Investors do not need to alter their portfolios merely because this proposal has been released.
A more useful approach is to review whether each fund continues to serve a clear purpose. Consider:
- Does the scheme match your financial goal?
- Is its risk level suitable for your capacity and time horizon?
- Has it performed consistently against an appropriate benchmark?
- Is the portfolio duplicating exposure already held through another fund?
- Are its costs reasonable for the strategy?
- Has the fund’s investment style remained consistent?
Operational reforms are important for the financial system, but disciplined product selection and portfolio construction remain more relevant to an investor’s long-term outcome.
Ranjit Jha’s Perspective
Improving settlement efficiency can strengthen mutual fund operations and reduce temporary liquidity requirements. However, operational improvements should not be interpreted as a promise of better returns.
For investors, the essential assessment remains whether a mutual fund’s strategy, risk level, costs and investment horizon are suitable for their financial goals. Efficient operations are valuable, but thoughtful product selection continues to matter more for long-term outcomes.
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