When you redeem units from a liquid mutual fund, you expect the money in your account the same day or the next business day. Behind that expectation is a timing problem that has existed for years.
Liquid and overnight funds pay out redemptions before they receive their own money from maturing instruments like TREPS and reverse repos. The payout comes first. The inflow arrives later the same day. Until now, funds managed this mismatch informally. SEBI’s July 10, 2026 circular gives it a formal, regulated, and investor-protected framework.
Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026, effective September 1, 2026, introduces the definitive rules for intraday borrowing by mutual funds in India. Here is exactly what it permits, what it does not, and what it means for your SIPs and redemptions.
Intraday Borrowing by Mutual Funds: The Problem This Circular Solves
Liquid and overnight funds are widely used as cash parking instruments by both retail investors and corporate treasuries. They need to process redemptions quickly, often on the same day. The problem is sequencing.
When a large redemption request arrives in the morning, the fund processes the payout. But the proceeds from maturing instruments in the fund’s portfolio- TREPS, reverse repos, government securities- may not arrive until later in the afternoon. The fund is effectively paying out before it has received.
Before this circular, funds handled this by maintaining very high cash buffers, which dragged returns, or by informal arrangements that lacked regulatory clarity. Neither approach was clean.
Example: A liquid fund has a maturity of TREPS worth Rs 50 crore arriving at 3 PM. A redemption request for Rs 30 crore is processed at 10 AM. The fund can now bridge that gap with a formal intraday borrowing that it repays when the TREPS matures. The investor receives payment without delay. The cost is borne by the AMC, not the investor.
What Is Intraday Borrowing? And How Is It Different from Normal Borrowing?
Mutual funds are ordinarily permitted to borrow up to 20% of a scheme’s net assets for a maximum period of six months, for meeting redemptions and similar obligations. This is the standard borrowing facility under Regulation 42(1) of the SEBI (Mutual Funds) Regulations, 2026.
Intraday borrowing is fundamentally different in two ways.
Duration: Intraday borrowing must be repaid the same day. If any amount is not repaid by the end of the day, it converts to overnight borrowing, which then falls under the normal 20% cap.
Cap: The 20% net assets limit does not apply to intraday borrowings. Instead, the borrowing amount is capped at the fund’s guaranteed receivables expected the same day.
The 20% Cap: What Changes and What Does Not
- Normal borrowings (up to 6 months): capped at 20% of net assets. This is unchanged.
- Intraday borrowings (same-day repayment): exempt from the 20% cap, but capped at guaranteed receivables due that day. Eligible receivables include TREPS maturity proceeds, reverse repo, G-Secs, T-bills, SDLs, interest thereon, subscription proceeds, and RBI and Clearing Corporation inflows.
- One rule that does not change: any intraday borrowing not repaid by day-end converts to overnight and is counted against the 20% cap. The intraday exemption only works if repayment happens the same day.
What Mutual Funds Are Permitted to Use It For
The facility is restricted to four specific purposes. It is not a general-purpose funding line.
| Permitted Use | What It Covers | Most Relevant For |
| Unitholder payouts | Redemption proceeds, IDCW (dividend) payouts, and interest payments to investors | Liquid funds, overnight funds, debt funds with high daily redemption volumes |
| Investment pay-ins | Meeting the scheme’s own payment obligations for securities already purchased | All debt schemes; occurs when buy-settlement precedes sell-settlement proceeds |
| MTM and forex settlements | Mark-to-market obligations and foreign exchange settlement requirements | Schemes with overseas exposure, hybrid funds with forex components |
| Repayment of existing borrowings | Clearing intraday borrowing positions already taken during the day | Any scheme that already used the facility earlier the same day |
What it cannot be used for: new investment decisions, enhancing yields, funding opportunistic trades, or any purpose other than the four categories above. SEBI has been explicit that intraday borrowing exists solely to bridge same-day timing gaps, not to amplify returns or substitute for normal liquidity management.
The Key Rules and Safeguards
SEBI paired the flexibility of this facility with strict accountability requirements. Here are all the rules in one place.
| Rule | What It Says | What It Means in Practice |
| 20% borrowing cap | Does NOT apply to intraday borrowings | Intraday borrowing is a separate facility, exempt from the standard cap as long as it complies with SEBI’s specified conditions |
| Borrowing limit | Capped at guaranteed receivables due the same day | Eligible receivables: TREPS maturity proceeds, reverse repo, G-Secs, T-bills, SDLs, interest thereon, sale proceeds of these securities, subscription proceeds, RBI and Clearing Corporation inflows |
| Repayment deadline | Same day without exception | Any borrowing not repaid by end of day converts to overnight borrowing, which then falls under the normal 20% cap |
| Who bears the cost | AMC only, not investors or the scheme | AMC absorbs borrowing cost and any loss from unforeseen delays in receiving expected funds |
| Board approval | Board of AMC and Trustees must approve | A formal written policy covering approval processes and monitoring must be published on the AMC’s website |
| Record-keeping | Scheme-wise records required | Each borrowing must document the specific liquidity mismatch that triggered it and the expected source of repayment. |
The Special Rule for Equity Index Funds and ETFs
A separate and narrower rule applies to equity-oriented index funds and equity-oriented ETFs, effective August 3, 2026.
SEBI introduced a Closing Auction Session in the equity cash segment of stock exchanges from August 3, 2026. This is a short trading window at the end of the trading day where prices are discovered through an auction process rather than continuous trading.
If an equity-oriented index fund or ETF has sell trades that were not fully executed during normal market hours, it can now borrow intraday to participate in the Closing Auction Session. This allows the fund to complete its sell-side execution at the day’s auction price rather than being unable to participate.
Key restriction: this borrowing is exclusively for Closing Auction Session participation. It cannot be used for any other purpose. The Closing Auction Session framework does not apply to the derivatives segment.
The Regulatory Timeline
The July 10 circular is the third iteration of SEBI’s guidance on intraday borrowing. Here is the full sequence.
| Date | What Happened |
| March 13, 2026 | SEBI’s first circular on intraday borrowing by mutual funds. Originally effective April 1, 2026. |
| March 25, 2026 | SEBI issued an update postponing the effective date to July 15, 2026 after AMCs requested more time to update systems. |
| July 3, 2026 | SEBI formally amended the SEBI (Mutual Funds) Regulations, 2026 to permit intraday borrowing under Regulation 42(2). |
| July 10, 2026 | SEBI issued the revised and definitive circular (Circular No. HO/(92)2026-IMD-POD-2/I/16006/2026), superseding the March circulars. |
| August 3, 2026 | Special rule effective for equity-oriented index funds and ETFs: intraday borrowing for under-executed sell trades is restricted to participation in the new Closing Auction Session. |
| September 1, 2026 | Full framework effective for all mutual fund schemes. |
What This Means for Different Types of Investors
The short answer for most retail investors: this is an operational improvement that makes your redemptions smoother and costs you nothing. Here is the breakdown by fund type.
| If You Invest In | What This Means for You |
| Liquid fund investor | This directly improves your experience. Liquid funds face the most acute version of the timing mismatch problem. From September 1, 2026, your redemption request can be processed using intraday borrowing when the fund is waiting on TREPS or reverse repo maturity proceeds. Faster settlement, no additional cost to you. |
| Overnight fund investor | Same benefit as liquid fund investors. Overnight funds face identical settlement timing challenges. This facility resolves the most common operational constraint these schemes face. |
| Equity index fund or ETF investor | A narrower change applies here. Intraday borrowing for equity-oriented index funds and ETFs is limited to one specific use: participation in the new Closing Auction Session introduced from August 3, 2026. If you hold a NIFTY 50 index fund or ETF, your fund can now participate in the end-of-day auction session even if sell trades were not fully executed before it began. |
| Debt, hybrid, and other scheme investors | Lower direct impact on day-to-day experience but a useful operational backstop. Debt funds with overseas exposure can use intraday borrowing for MTM and forex settlement. Hybrid funds can use it for investment pay-ins. The AMC absorbs all costs, so the impact on your NAV is nil. |
| Any mutual fund investor | One thing is unchanged: your protection. AMCs bear all costs and risks of this facility. SEBI has been explicit that no cost is passed to investors or schemes. Your NAV is not affected by the fund borrowing intraday. |
Final Words: A Plumbing Fix That Makes the System Work Better
This circular is not a headline investment opportunity. Investors do not need to change their portfolios, switch funds, or take any action in response to it.
What it does is fix a long-standing operational gap in how mutual funds, especially liquid and overnight funds, manage the timing mismatch between paying investors and receiving their own proceeds. The result is smoother same-day redemptions, a clean regulatory framework, and investor costs that stay at zero because AMCs bear everything.
For investors in liquid and overnight funds: this is a quiet infrastructure improvement. Your redemption experience gets better. Your costs stay the same. If you want to understand how your specific liquid or overnight fund manages redemptions and liquidity, an AMFI-registered distributor like VSJ FinMart can walk you through how the fund’s portfolio is structured and what this regulatory change means for your holdings.
Read the original SEBI circular at: Intraday borrowing facility availed by mutual funds.s
Frequently Asked Questions
Q: What is intraday borrowing by mutual funds and why did SEBI allow it?
Intraday borrowing is same-day borrowing used by mutual funds to bridge timing gaps between outgoing payments and incoming proceeds. SEBI allowed it to formalise an existing industry practice in liquid and overnight funds, where redemption payouts must be processed before maturity proceeds from instruments like TREPS and reverse repos arrive. The July 10, 2026 circular provides the definitive regulatory framework, effective September 1, 2026.
Q: Will intraday borrowing by mutual funds increase costs for investors?
No. SEBI’s circular is explicit that AMCs bear all costs of intraday borrowing. If the fund borrows intraday and pays interest on it, that cost is absorbed by the AMC, not charged to the scheme or passed on through the NAV. Any additional loss from unforeseen delays in receiving expected funds is also absorbed by the AMC. From an investor’s perspective, the cost impact is zero.
Q: Does the intraday borrowing rule apply to equity mutual funds?
For regular equity mutual funds (actively managed), the four permitted uses apply where relevant (MTM obligations, investment pay-ins). For equity-oriented index funds and ETFs specifically, a separate rule applies from August 3, 2026: borrowing is restricted to participation in the new Closing Auction Session when sell trades were not fully executed during normal hours.
Q: What is the borrowing limit for intraday borrowing by mutual funds?
Intraday borrowing is exempt from the normal 20% net assets cap, but it is capped at the fund’s guaranteed same-day receivables. Eligible receivables include maturity proceeds from TREPS, reverse repos, G-Secs, T-bills, SDLs, subscription proceeds, and inflows from RBI and Clearing Corporations. The fund cannot borrow more than it is guaranteed to receive that same day.
Q: What happens if a mutual fund cannot repay its intraday borrowing by end of day?
Any intraday borrowing not repaid by end of day automatically converts to overnight borrowing. Once it converts to overnight, it falls under the normal 20% net assets cap that applies to all standard mutual fund borrowings. SEBI requires AMCs to maintain scheme-wise records identifying the expected repayment source for each borrowing, precisely to prevent unplanned conversions.
Disclaimer
The information provided in this blog is for educational and informational purposes only and should not be construed as investment advice. Please consult a qualified financial advisor before making any investment decisions. Shashikant Chanderkumar Mudaliar (ARN: 319377), operating under the brand name VSJ FinMart, is an AMFI-registered Mutual Fund Distributor (MFD) and does not provide investment advisory services. Mutual fund investments are subject to market risks. Past performance is not indicative of future results. Please read all scheme-related documents carefully before investing. Registration details can be verified at www.amfiindia.com/locate-distributor.