Equity Mutual Funds To Move To T+2 Settlement From Feb. 1 — BQ Exclusive

Investors will soon benefit from faster settlement of redemptions in equity mutual funds.

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Equity mutual funds will switch to a shorter settlement period starting Feb. 1.

Redemptions in equity mutual funds will be one day shorter when they switch to T+2 settlement in February, said A Balasubramanian, chairman of the Association of Mutual Funds in India.

"The mutual fund industry has been making proactive changes in the interest of investors in light of the recent move by Indian stock exchanges to move to a T+1 settlement for equity," Balasubramanian, who is also the managing director and chief executive officer of Aditya Birla Sun Life AMC Ltd., told BQ Prime.

From Feb. 1, an investor in an equity mutual fund scheme who chooses to redeem their investment will receive the proceeds in two days rather than the current three-day wait.

The move by mutual funds is due to a change in the time that stock exchanges in India use to settle trades.

From this Friday, Indian stocks accounting for 80% of India's market capitalisation moved to a shorter T+1 trade cycle. Shares of 218 companies made the transition, making India the second market after China to implement the next-day settlement.

"The move to a shorter settlement in equity mutual funds will be beneficial for the investor, in that it will provide liquidity earlier," said Prableen Bajpai, founder of FinFix Research.

"But it does not change the process of investing. Equity should primarily be used for long-term goals. Short-term requirements for funds, like in the case of emergencies, should be planned with fixed income investments like liquid funds."

An exception here is the arbitrage fund, according to Bajpai.

These funds are categorised as "equity" but are used by investors, usually those with a higher net worth, as an alternative to short-term debt funds.

The move to a shorter settlement will be more advantageous in this category, Bajpai said.