Mutual funds, primarily liquid and overnight schemes, routinely face a timing mismatch between when they pay investors and when they receive cash from underlying instruments. Simply put, mutual funds sometimes have to pay investors before money from their own investments comes in.
Redemption proceeds are typically paid out the next business day morning, while inflows from TREPS (Tri-Party Repo Dealing System) and reverse repo often arrive later the same day. To bridge this gap, mutual funds enter into formal same-day borrowing arrangements with financial institutions such as banks.
A March 13, 2026 SEBI circular (https://tinyurl.com/sebimfborrow) operationalises this practice under the new SEBI (Mutual Funds) Regulations, 2026, effective April 1, 2026. It sets clear rules for such borrowing, exempts same-day borrowing from the 20 per cent cap, and clarifies who bears the cost and risk.
Timing gap
Schemes, especially liquid and overnight funds, process redemption payouts before receiving maturity proceeds from instruments such as TREPS and reverse repos. This creates a same-day liquidity gap. To avoid delays in payouts, funds borrow for a few hours until receivables are credited later in the day. While such arrangements already exist, the absence of explicit regulatory detailing leaves room for variation in implementation.
Mutual fund schemes can generally borrow up to 20 per cent of assets for redemptions, investor payouts or certain trade settlements, for up to six months. But this cap will not apply to same-day borrowing, subject to SEBI’s conditions.
Usage rules
The SEBI circular lays down a clear framework for same-day borrowing.
First, the asset management company and the mutual fund’s trustees must approve this borrowing policy, and it must be disclosed on the asset management company’s website.
Second, the use of intraday borrowing is restricted to specific purposes: meeting redemption obligations, paying interest or income distribution cum capital withdrawal (IDCW), and related payouts to unitholders. It cannot be used for broader leverage or investment activities.
Third, the fund can borrow only against money that is due to come in the same day. Funds can borrow only up to the level of “guaranteed receivables” due from specified sources such as the Government of India, RBI and Clearing Corporation of India Ltd. This is money that is assured to come in the same day. Eligible receivables include maturity proceeds from TREPS and reverse repo, proceeds from government securities and treasury bills, interest on such securities, and sale proceeds of these instruments. This means the borrowing must be backed by money that is expected the same day, and cannot be unlimited.
Cost burden
A key clarification in the circular relates to who bears the cost of such borrowing. SEBI states that any cost of intraday borrowing must be borne by the AMC and not charged to the scheme.
Further, if there is any delay or shortfall in receiving the expected funds due to unforeseen events or settlement issues, the resulting cost or loss must also be absorbed by the AMC.
This effectively separates operational liquidity management from investor returns. The scheme’s NAV is not meant to reflect the cost of bridging short-term mismatches arising from fund operations. In other words, investors should not bear these operational borrowing costs through the scheme.
In addition, AMCs are required to comply with existing regulatory provisions relating to borrowing and liquidity management, including clauses under the Fourth Schedule of the 2026 regulations and relevant provisions of the SEBI Master Circular for mutual funds.
ETF clause
The market regulator also addresses borrowing by equity-oriented index funds and ETFs (exchange traded funds). Stock exchanges will introduce a closing auction session, a final price-setting window at market close, from August 3, 2026.
If these funds are unable to complete all their sale transactions during market hours, they may borrow only to participate in the closing auction session. This means such borrowing is allowed only to help these funds complete trades within the exchange’s trading framework.
Overall, the circular formalises a narrowly defined, operational use of borrowing within mutual funds. It gives funds flexibility for same-day borrowing, but only with clear limits on how the money can be used, how much can be borrowed and who approves it.
By making the AMC bear the cost and risk, the rules keep investors separate from the fund house’s day-to-day cash management.
Operational cash mismatches stay ring-fenced, with fund houses absorbing risk
Published on March 21, 2026
