Currently, mutual funds follow T+2 settlement cycle which means trades are settled two days after the date of transaction. Mutual funds moved to T+2 in February this year, a month after equity markets.
In a recent press conference, Sebi chairperson Madhabi Puri Buch said the reduced settlement timeline in equity markets will have a bearing on mutual fund units as the regulator aims to cut down on the allotment and redemption of units to one day.
The move is being welcomed by wealth advisors who refer to this move as progressive and futuristic.
Ravi Saraogi, Co-founder, Samasthiti Advisors, says, “Overall, it is a good move, particularly for institutional investors as they make sure to adhere to the cut-off time. Sometimes investors carry out transaction on Friday, and then it takes a total of four days before the trade is settled. So, when T+1 kicks in, it will be good for the counterparties involved. When stock settlement can happen quicker, the mutual funds should follow suit because mutual funds are investing in stocks.”
“Moreover, there is bottleneck in this rollout – only use of technology. There is no new innovation as such,” he adds.
Sridharan S., Founder of Wallet Wealth, also echoes the same sentiments and says that it will bring uniformity across the asset classes.
“It is definitely good for investors as liquidity is seen as a concern for equity assets. This move is meant for the equity which is currently being settled in T+1 on stock markets. So, this move, when implemented will bring uniformity across the asset classes in stocks markets as well as in mutual funds,” says Sridharan.
Some believe that the projected shift to T+1 will increase liquidity in the system.
"The move to shift to T+1 will increase liquidity and help the investor plan their fund flow better. It will also add to the comfort of equity investors as fixed income investments are already following the T+1 settlement cycle," says Ajaykumar Gupta, Chief Business Officer, Trust Mutual Fund.
Although mutual fund investors would be able to access their funds in a shorter time span with this move, investors should stick to their equity allocation in alignment with their financial goals, suggest investment advisors.
"This (shifting to T-1) is likely to reduce the time required for mutual fund investors to access funds held in equity oriented mutual funds. However, it is important to note that the need to continue to hold equity mutual funds for longer periods for wealth creation does not change, only because access to redemption proceeds becomes faster," says Vishal Dhawan, Founder & CEO of Plan Ahead Wealth Advisors.
To sum up, as asset management companies migrate from T+2 to T+1 settlement cycle, investors stand to gain by shorter turnaround time, and greater frequency of transactions.