The Indian equity market has gone through a major transformation in recent years, with the Securities and Exchange Board of India (SEBI) taking steps to make the market more efficient and investor-friendly. One of these measures is the introduction of the T+1 settlement cycle for equity markets, which has now been extended to mutual funds as well.
The Indian markets have moved to a T+1 settlement cycle for all stocks, shortening the settlement cycle by a day and making the availability of funds a day sooner than at present. In line with this shift, asset management companies (AMCs) will also move to a shorter redemption payment cycle of T+2 for equity schemes from February 1, 2023.
Let us understand it in detail.
What does the settlement cycle mean in the stock market?
The settlement cycle is the time taken to transfer the funds or securities between parties involved in a transaction. It includes the time taken for the execution of the trade, followed by the settlement of the transaction.
The settlement cycle for the Indian stock market has traditionally been T+3 i.e. three days after the completion of the transaction the funds are made available to the investor. With the move to the T+1 settlement cycle, the time taken for the settlement process is reduced to one day, thus improving the liquidity in the market.
How does it benefit the investors?
With the improvement in the settlement cycle, AMCs have decided to move to a shorter redemption payment cycle of T+2 for mutual fund equity schemes. Currently, the redemption process takes around 3 days to transfer the funds to the investor’s bank account.
However, from February 1, 2023, the redemption process will be completed within two days, thereby providing faster access to the funds to the investor. This move is expected to benefit the investors as it will improve their liquidity.
A shorter redemption period also encourages investors to invest in mutual funds as they can avail the benefit of quicker liquidation. Moreover, with a shorter redemption process, investors can take advantage of market opportunities faster.
This is not the first time that markets regulator Sebi has chosen to shorten the settlement cycle. Earlier in 2002, the capital markets regulator had cut the number of days in the settlement cycle from T+5 days to T+3 days, and then in 2003, it was reduced to T+2 days.
Market experts believe that the T+1 settlement system will allow the cycle of money to move faster without waiting for an extra day and it puts India ahead of even the US, which is the pre-eminent destination when comes to capital markets.