The Impact of T+1 Settlement Applicable to Stocks on Your Equity Mutual Funds

As an investor, you must have noticed that after purchasing or selling a stock, bond, or mutual fund, you must wait two days for the stock to be reflected in your Demat Account or the fund to be shown in your account. The time required to do so, i.e., T + Days of Settlement will now be shortened.

Considering the request from various stakeholders, the Securities and Exchange Board of India (SEBI), in a circular dated September 07, 2021, announced the shift in the trading settlement cycle for stocks to 'T+1 Rolling Settlement' from the current 'T+2 Rolling Settlement' cycle.

Having said that, it is not the first time that market regulator SEBI has chosen to shorten the settlement cycle. The capital markets regulator had reduced the number of days in the settlement cycle from T+5 to T+3 days earlier in 2002. The current 'Transaction + 2 days' (T+2) settlement system was implemented in 2003, following the markets regulator SEBI's decision to transition the stock markets from an older rolling settlement of 'T+3', which had been in use since 2001.

According to the market regulator SEBI, the 'T+1 settlement cycle' is now being implemented to all equity stocks. The initial list of stocks eligible for the T+1 settlement cycle became available on February 25, 2022, while the final list of stocks eligible for the T+1 settlement cycle went live on January 27, 2023.

Although the T+1 settlement cycle does not directly apply to mutual funds, it will indirectly benefit the mutual fund industry.

How does the 'T+1 Settlement' cycle impact the mutual fund industry?

At the moment, redemptions from equity mutual funds occur on a T+3 basis. If you redeem your equity mutual fund investments, the funds will be sent into your account 3 days after the redemption request is placed.

However, beginning February 01, 2023, investors will benefit from faster redemption settlement in equity mutual funds. Association of Mutual Funds in India (AMFI) now plans to bring down the settlement time for mutual funds to T+2 w.e.f. from February 01, 2023. This is as per the statement given to the media by Mr A Balasubramanian, the Chairman (AMFI) and MD & CEO of ABSL Mutual Fund.

Since 2003, when the stock market followed the T+2 settlement cycle, equity mutual funds have followed the T+3 settlement cycle. This is due to the fact that mutual fund houses invest in stocks the day after they get paid from the markets.

Thus, the correlation between the Indian stock exchange and the mutual funds industry is such that, after the implementation of the T+1 settlement cycle in the Indian stock market, the mutual fund industry will apply the T+2 settlement cycle for equity mutual funds.

Participation in equity funds, debt funds, hybrid funds, and gold through ETF offers is becoming increasingly popular among retail investors. Faster liquidity in mutual funds via ETF T+1 execution will increase the percentage share of investors taking the ETF route.

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How will this move by SEBI benefit the Indian capital market?

For many years, the Indian capital market has been at the forefront of modernisation and industry standards, creating a model for emerging markets to emulate.

With the implementation of the T+1 settlement cycle, which no other country possesses except China, the Indian stock market is becoming a trendsetter for even developed countries. Since the move to T+1 is in a phased manner, the transition will be smooth. The quicker liquidity and a lower risk of default under the T+1 settlement cycle will boost market efficiency.

To conclude...

The T+1 settlement cycle in the Indian stock market, which began in February 2022, will become fully operational on February 01, 2023, with the inclusion of the final set of 256 stocks, which includes all Nifty 50 and Sensex stocks such as State Bank of India (SBI), Reliance Industries Ltd. or (RIL), Infosys, Tata Motors, and many others.

With this implementation, securities bought or sold from Friday onwards, i.e., January 27, 2023, will reflect in one's Demat Account after a period of one business day. A shorter settlement period means that trades are completed swiftly. The investor can withdraw money a day sooner in a T+1 settlement cycle, providing superior liquidity.

However, keep in mind that equity investments should be made primarily for long-term goals. Despite the fact that transactions are now being settled quite speedily, do not be lured to redeem your investment in poor market conditions. Short-term requirements for funds, like in the case of emergencies, should be planned with short-duration debt funds like liquid funds.

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.