The Securities and Exchange Board of India (SEBI) has introduced a new framework that allows mutual funds to use intraday borrowing to manage short-term cash mismatches.
The rule, announced on March 13, 2026, will come into effect from April 1, 2026. While this may sound technical, it’s actually a practical step to make mutual funds function more smoothly.
Let’s understand what this really means.
Why do mutual funds need intraday borrowing?
Mutual funds deal with constant inflows and outflows. One common issue they face is a timing mismatch.
Here’s how it works:
Investors’ redemption requests are usually processed in the morning (T+1 day), but the money from investments like TREPS or reverse repo often comes in later in the evening.
So, for a few hours, the fund may not have enough cash to pay investors, even though the money is technically on the way.
To handle this gap, funds sometimes borrow money for a few hours and repay it the same day. This is called intraday borrowing.
What has SEBI changed?
SEBI has now formalised this process by introducing a clear framework. The regulator has allowed mutual funds to use intraday borrowing only for specific purposes, such as:
- Meeting redemption requests
- Paying income or interest to investors
Importantly, this is not a free-for-all. SEBI has added safeguards to ensure that borrowing is used responsibly and does not increase risk for investors.
Key rules you should know
SEBI has added strict conditions to ensure this facility is used responsibly:
- Borrowing limit: The amount borrowed cannot exceed the receivables expected on the same day
- Eligible sources: These receivables can come from instruments like TREPS, reverse repo, government securities, treasury bills, etc.
- No cost to investors: Any cost of borrowing will be borne by the asset management company (AMC), not the mutual fund scheme
- Risk on AMC: If there is any delay or issue in receiving funds, the AMC will absorb the loss
- Policy requirement: Every AMC must have a board-approved policy for using intraday borrowing and disclose it publicly
These rules ensure that investors are protected and that funds don’t misuse this facility.
What about existing borrowing rules?
Earlier, mutual funds were allowed to borrow up to 20% of their net assets for up to 6 months to meet liquidity needs.
However, SEBI has clarified that intraday borrowing is separate and will not fall under this limit, provided all conditions are met.
Why did SEBI introduce this?
The main goal is simple: better liquidity management and investor protection.
In recent years, especially during volatile market conditions, mutual funds have faced sudden spikes in redemption requests. Without enough immediate cash, funds might be forced to sell assets quickly, sometimes at unfavourable prices.
This allows mutual funds to meet redemption requests smoothly without any disruption. It also helps avoid panic selling of assets during volatile market conditions, ensuring that investments are not liquidated at unfavourable prices. As a result, investors are more likely to receive their money on time without delays.
This ultimately improves the overall stability of the mutual fund ecosystem.
What does this mean for investors?
For most investors, this change will happen behind the scenes. You may not even notice it.
But indirectly, it’s a positive move:
- Faster and smoother redemptions
- Lower chances of forced selling in markets
- Better handling of liquidity stress
Especially in liquid and overnight funds, where timely payouts are critical, this framework adds an extra layer of efficiency.
