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What Is This Circular About?
Let’s say you have money in a Liquid Fund or an Overnight Fund. One day, you decide to redeem (withdraw) your money. The fund house sends it to you the next morning.
But here’s the catch — the fund house itself gets its own money back (from overnight lending to banks and the government) only in the evening of that same day.
So there’s a timing gap. The fund has to pay you in the morning, but it gets its money back only by evening. To fill this gap, the fund house takes a short loan from a bank for just a few hours. Think of it like a friend lending you money in the morning because your salary comes in the evening.
This SEBI circular lays down clear rules for how this short-term borrowing should work, who can do it, and most importantly — who pays for it (spoiler: not you). You can read the original circular here.
Key Numbers You Should Know
20%
Max a fund can borrow
(of its total size)
(of its total size)
6 Mo
Longest time
a loan can last
a loan can last
No Cap
Same-day borrowing
has no 20% limit
has no 20% limit
₹0
Cost to investors
AMC pays everything
AMC pays everything
How Does Same-Day Borrowing Work?
Here’s what happens, step by step:
1
Morning (Next Day) — You Get Paid
You asked for your money back yesterday. The fund house sends you your redemption amount first thing in the morning.
2
The Problem — Fund Doesn’t Have Its Money Yet
The fund had lent its money overnight (to banks/government). That money won’t come back until evening. So right now, there’s a gap.
3
Quick Fix — Fund Borrows From a Bank
To cover this gap, the fund house takes a short loan from a partner bank. This loan lasts only a few hours — not even a full day.
4
Evening — Everything Settled
The overnight lending money comes back. The bank loan is repaid. Any cost or interest on this loan is paid by the AMC (fund house) — not by you.
What Are the New Rules? (From 1 April 2026)
SEBI has set four clear conditions for same-day borrowing by mutual funds:
Rule 1 Board Must Approve It
The AMC (fund house) board and the trustee board must both approve a written policy for same-day borrowing. This policy must be uploaded on the AMC’s website so that everyone — including you — can read it.
Rule 2 Only to Pay Investors
This borrowing can only be used for one purpose — to pay investors. That means paying for redemptions, interest, or dividend (IDCW) payouts. The fund cannot use this loan for anything else.
Rule 3 Can’t Borrow More Than What’s Coming In
The fund can only borrow up to the amount of money it is sure to receive back the same day. This money must come from safe, government-backed sources like overnight lending, Reverse Repo, or Government bonds maturing that day.
Rule 4 AMC Pays All Costs
Any interest, fees, or charges on this borrowing are paid by the AMC from its own pocket. If something goes wrong — say the expected money gets delayed — the AMC still bears the loss. Investors pay nothing.
Where Can the Fund’s Expected Money Come From?
The fund can only borrow against money that is guaranteed to come in the same day from these sources:
✔ Allowed Sources of Same-Day Money
- Money coming back from overnight lending (TREPS)
- Money returning from Reverse Repo
- Government bonds (G-Sec, T-Bill, SDL) maturing that day
- Interest being paid on Government bonds that day
- Government bonds that were sold and payment is due that day
Real-Life Example
💡 Let’s Say — “ABC Liquid Fund”
9:00 AM (Next Day)
Investors Want ₹50 Cr
Redemption requests came in yesterday. ABC Liquid Fund must pay ₹50 Crore to investors this morning.
9:30 AM
Borrows ₹50 Cr
The fund’s ₹55 Cr from overnight lending won’t come until evening. So it borrows ₹50 Cr from a partner bank to pay investors now.
5:00 PM
Loan Repaid
₹55 Cr comes back from overnight lending. ₹50 Cr bank loan repaid. Any cost? Paid by the AMC — not by investors.
What About Index Funds and ETFs?
Sometimes, when an Index Fund or an ETF tries to sell shares on the stock exchange, the full order doesn’t get completed during normal trading hours.
SEBI is starting a new system called the “Closing Auction Session” — a special session at the end of the trading day where these pending sell orders can be completed.
To take part in this Closing Auction, Index Funds and ETFs are allowed to borrow money for a short time (within the same 20% and 6-month limits). But this borrowing is allowed only for this specific purpose — to complete pending trades in the Closing Auction. Nothing else.
📅 Important Dates to Remember
14 January 2026 — SEBI announced the new Mutual Fund Regulations, 2026
1 April 2026 — Same-day borrowing rules come into effect for all mutual funds
3 August 2026 — Closing Auction Session starts on stock exchanges; ETF/Index Fund borrowing for this purpose becomes available
What Does This Mean for You?
✅ Good News for Investors
- Your money is safe. The fund house pays for all borrowing costs. Nothing is taken from your returns.
- Your redemption won’t be delayed. This system makes sure the fund has money ready to pay you on time, even when its own money hasn’t come back yet.
- Stronger rules protect you. SEBI has made sure the fund can only borrow against safe, guaranteed money — so there’s very little risk involved.
- Full transparency. Every AMC must put its borrowing policy on its website. You can read it anytime.
Disclaimer
This blog post has been prepared by The Excelist Learning Solutions Private Limited for educational and informational purposes only. It is a simplified summary of SEBI Circular No. HO/(92)2026-IMD-POD-2/I/6961/2026 dated March 13, 2026, and is not a substitute for reading the original circular issued by the Securities and Exchange Board of India (SEBI).
This content does not constitute legal advice, investment advice, or a recommendation of any kind. Readers are advised to refer to the original SEBI circular available at www.sebi.gov.in and consult their own legal, compliance, or financial advisor before making any decisions based on this information.
While every effort has been made to ensure accuracy, The Excelist Learning Solutions Private Limited and its directors, employees, and associates do not guarantee the completeness or correctness of the information provided herein and shall not be liable for any loss, damage, or consequence arising from the use of this content.
Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance is not indicative of future results.
© 2026 The Excelist Learning Solutions Private Limited. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted without the prior written permission of the publisher.