Synopsis: The Securities and Exchange Board of India (SEBI) has issued a new circular allowing mutual funds to use intraday borrowing to manage temporary cash flow mismatches. The rule, effective from April 1, 2026, is designed to ensure timely redemption payments to investors while improving transparency and operational efficiency in the mutual fund industry.
SEBI Allows Intraday Borrowing for Mutual Funds from April 1, 2026
The Securities and Exchange Board of India (SEBI) has introduced a significant reform for the mutual fund industry by permitting intraday borrowing to manage temporary liquidity gaps. The new rule will come into effect from April 1, 2026.
According to SEBI, mutual fund schemes sometimes face short-term cash mismatches when redemption payments must be made to investors before the scheme receives funds from other transactions later the same day. The new framework allows fund houses to temporarily borrow funds within the same trading day to manage such situations.
Purpose of Intraday Borrowing
SEBI clarified that intraday borrowing will only be permitted for specific operational purposes and cannot be used for investment activities or speculative trading.
Permitted uses include:
- Investor redemption payments
- Unit repurchase obligations
- IDCW (Income Distribution cum Capital Withdrawal) payments
The borrowing must be repaid within the same day, ensuring that it remains a short-term liquidity management tool rather than a financing mechanism.
Borrowing Limits Based on Same-Day Receivables
Under the new rules, mutual funds can borrow intraday funds only up to the amount that is guaranteed to be received later on the same day.
Eligible receivables may include:
- Maturity proceeds from TREPS transactions
- Proceeds from reverse repo transactions
- Maturity payments from government securities
- Proceeds from treasury bills
- Payments from state development loans
This structure ensures that the borrowing is backed by expected incoming funds, reducing risk within the system.
Mandatory Policy Framework for AMCs
SEBI has directed all Asset Management Companies (AMCs) to formulate a clear internal policy governing the use of intraday borrowing.
This policy must:
- Be approved by the AMC’s board of directors and trustees
- Be publicly disclosed on the AMC’s website
- Clearly outline operational procedures and risk controls
The move is aimed at strengthening transparency and accountability in the mutual fund industry.
AMCs to Bear Borrowing Costs
The regulator has made it clear that any cost incurred for intraday borrowing will not be charged to the mutual fund scheme or investors.
Instead, the Asset Management Company will bear the entire borrowing expense. Additionally, if expected funds are delayed or losses occur due to the borrowing arrangement, the AMC will be fully responsible.
Separate Rules for ETFs and Index Funds
SEBI has also introduced borrowing guidelines for equity-based index funds and exchange-traded funds (ETFs).
These funds will be allowed to borrow only for participation in the closing auction session of stock exchanges. This provision is scheduled to take effect from August 3, 2026.
Step Aimed at Improving Investor Protection
SEBI stated that the circular has been issued in the interest of investors and to improve the operational efficiency of mutual fund schemes.
Market experts believe the move will help fund houses manage liquidity more effectively while ensuring timely payments to investors. It is also expected to enhance transparency and strengthen investor confidence in the mutual fund ecosystem.
📌 Key Takeaway
SEBI has allowed mutual funds to use intraday borrowing from April 1, 2026, to manage temporary liquidity gaps and ensure timely redemption payments. The borrowing must be repaid within the same day, and all related costs will be borne by the asset management company, protecting investors from additional charges.