Selling a mutual fund unit doesn’t instantly lead to the transfer of proceeds into the bank account. It, however, takes a couple of days before the money is transferred to the bank account.
While the stock market securities now adhere to T+1 cycle, the same transaction takes one day longer in case of mutual fund units.
Earlier it used to take a minimum of three days, but with effect from February 1, the settlement cycle was cut down by one day. This means now it will take T+2 for the transaction to close.
What is T+2 settlement cycle?
T+2, effectively, means two business days over and above of the day a trade takes place. This means that when an investor redeems mutual fund units on Wednesday, the proceeds will be deposited in his bank account on Friday.
At the same time, Navi Mutual Fund has announced that it will follow T+1 cycle. This means the sale proceeds will be transferred within a day of transaction.
One industry insiders says that Navi’s announcement is a fallout of shorter settlement cycle for tradeable securities. Since stocks, ETFs, debt instruments and even REITs migrated to the shorter cycle of T+1 with effect from January 27 — fund houses that manage tradeable units are also supposed to follow this shorter transaction cycle instead of T+2.
But it doesn’t imply that other mutual fund houses are expected follow this precedent in a bid to shorten their settlement cycle.
“It won’t be easy to manage the liquidity for other mutual fund houses in case of T+1 cycle just as Navi. However, they have no choice but to follow the mandate of T+2, so that much has to be done,” said a mutual fund industry insider on the condition of anonymity.
As far as tradeable securities are concerned, the shorter cycle of T+1 — while even the US markets follow T+2 cycle — puts Indian financial markets in an advantageous position, thus incentivising retail investors to trade actively.