Mutual funds play a key role in helping investors grow their money in a simple and diversified way. But behind the scenes, fund managers often face short-term cash flow mismatches due to timing differences in inflows and outflows. To solve this issue, SEBI (Securities and Exchange Board of India) has introduced a new rule that allows intraday borrowing for mutual funds. This move is mainly aimed at improving liquidity management and ensuring that investors receive their redemption money on time without delays.
In this blog, we have provided all the details about the SEBI new rule for mutual funds. Along with this, we have also provided a free PDF covering the details and a practice quiz.
What is SEBI’s new rule allowing intraday borrowing in mutual funds?
SEBI has permitted Asset Management Companies (AMCs) to borrow funds on a temporary intraday basis to manage short-term liquidity gaps. This means mutual funds can now borrow money during the trading day and repay it within the same day.
This facility is especially useful when there is a mismatch between redemption requests and actual cash availability in the fund.
| Point | Details |
| Regulator | SEBI |
| Facility | Intraday borrowing |
| Users | Mutual Fund AMCs |
| Purpose | Managing temporary cash shortages |
| Repayment | Same day (intraday basis) |
| Applicable funds | Liquid funds, overnight funds |
Download SEBI Intraday Borrowing for Mutual Funds PDF
Download the free PDF to get a complete and structured explanation of SEBI’s intraday borrowing rule along with key concepts and examples.
Attempt SEBI Intraday Borrowing Practice Quiz
Test your understanding of the SEBI intraday borrowing rule with a quick practice quiz based on real exam-level concepts and scenarios.
1. An AMC faces redemption of ₹50 crore in the morning, while expected inflow by evening is ₹40 crore. What is the maximum intraday borrowing allowed?
2. Which of the following best explains the need for intraday borrowing?
3. An AMC borrows funds intraday and uses them to invest in equity shares expecting profit. This action is:
4. Which of the following requires approval for intraday borrowing?
5. In case of general borrowing, what is the maximum borrowing limit?
6. Which of the following is TRUE regarding intraday borrowing limit?
7. An AMC expects ₹100 crore inflow from government securities by evening. It needs ₹120 crore in the morning. How much can it borrow intraday?
8. Which of the following is NOT an eligible purpose for intraday borrowing?
9. TREPS transactions involve which additional entity apart from borrower and lender?
10. The main risk mitigated by intraday borrowing is:
11. If borrowing cost arises due to intraday borrowing, who bears it?
12. Which fund category is MOST affected by intraday liquidity mismatch?
13. What happens if NAV increases from ₹10 to ₹12 and ₹2 is paid under IDCW?
14. Which instrument is backed by government securities?
15. Intraday borrowing must be repaid:
16. Which of the following is an eligible inflow for intraday borrowing?
17. If redemption is processed in morning but inflow comes in evening, this situation is called:
18. Which statement is correct for overnight funds?
19. General borrowing duration cannot exceed:
20. Intraday borrowing policy must be disclosed:
21. Which of the following best describes ETF?
22. If AMC borrows more than expected inflow, it violates:
23. Which of the following ensures transaction guarantee in TREPS?
24. IDCW is suitable for:
25. Liquid funds invest in instruments up to:
26. Which of the following is NOT allowed under intraday borrowing?
27. Reverse repo represents:
28. Which entity regulates mutual funds in India?
29. The key objective of SEBI’s rule is:
30. Which inflow is most reliable for intraday borrowing?
31. Intraday borrowing is linked to:
32. Which of the following is TRUE?
33. If AMC fails to receive inflow, risk is borne by:
34. Which of the following is NOT a money market instrument?
35. T+1 settlement means:
36. Which is correct regarding NAV?
37. Intraday borrowing helps mainly in:
38. Which entity manages collateral in TREPS?
39. Which scheme offers highest liquidity?
40. Which of the following best defines intraday borrowing?
Quiz Summary
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Why did SEBI introduce intraday borrowing for mutual funds?
SEBI introduced this rule to solve a practical liquidity problem faced by mutual funds, especially in short-term debt schemes.
Mutual funds often receive redemption requests in the morning, but the actual inflow from securities matures later in the day. This creates a temporary cash gap, which can affect smooth payouts.
- Redemption requests are processed early in the day
- Cash inflows from investments come later
- Temporary liquidity mismatch occurs
- Intraday borrowing bridges this gap
- Ensures timely payment to investors
What is an Asset Management Company (AMC)?
An Asset Management Company (AMC) is the organization that manages mutual fund schemes on behalf of investors. It pools money from investors and invests it in different financial instruments like equities, bonds, and money market securities.
- AMC manages mutual fund schemes
- Invests pooled investor money
- Charges a management fee
- Responsible for NAV calculation
- Ensures compliance with SEBI rules
What are liquid funds and overnight funds?
Liquid and overnight funds are short-term debt mutual fund schemes that are most affected by cash flow mismatches.
- Liquid funds invest in instruments with maturity up to 91 days
- Overnight funds invest for just 1 day
- Both are highly liquid and low-risk
- Commonly used for parking surplus cash
- Sensitive to redemption timing issues
What is redemption and why does it create liquidity mismatch?
Redemption means withdrawing money from a mutual fund scheme. When many investors redeem units at the same time, the fund must arrange cash immediately.
- Investors request withdrawal (redemption)
- Fund must pay within settlement timelines
- Investments may not mature immediately
- Temporary cash shortage occurs
- Leads to liquidity pressure on AMCs
What is TREPS in mutual funds?
TREPS (Tri-Party Repo) is a short-term money market instrument used by mutual funds to park or borrow funds for very short durations.
- Full form: Tri-Party Repo
- Used for short-term lending and borrowing
- Backed by government securities
- Highly safe and liquid instrument
- Helps in daily liquidity management
What is IDCW in mutual funds?
IDCW stands for Income Distribution cum Capital Withdrawal, which is a payout option in mutual funds where investors receive periodic income.
- Earlier known as dividend option
- Investors receive periodic payouts
- NAV reduces after payout
- Used for income generation
- Suitable for regular cash flow needs
What are general borrowing rules for mutual funds?
SEBI allows mutual funds to borrow money under strict conditions to manage operational requirements like redemptions or payouts.
- Borrowing allowed for operational needs only
- Includes redemption and IDCW payments
- Maximum borrowing limit is 20% of net assets
- Maximum tenure allowed is 6 months
- Borrowing cannot be used for investment purposes
What are the rules for intraday borrowing under SEBI guidelines?
Intraday borrowing is strictly regulated to ensure it is used only for liquidity management and not for speculation or investment purposes.
- Must be approved by AMC board and trustees
- Must be disclosed publicly
- Only for operational liquidity needs
- No speculative use allowed
- Borrowing linked to expected same-day inflows
- Cannot exceed anticipated receivables
Which inflows are eligible for intraday borrowing?
SEBI allows intraday borrowing only against confirmed or highly certain same-day inflows.
- TREPS maturity proceeds
- Reverse repo maturity
- Government securities maturity (T-Bills, SDLs, STRIPS)
- Interest income from securities
- Sale proceeds of securities
FAQs
SEBI has allowed mutual funds to take intraday borrowing to manage short-term liquidity gaps.
It is borrowing taken and repaid on the same day to meet temporary cash requirements.
To solve timing mismatch between redemption payouts and actual cash inflows.
Liquid funds and overnight funds are most impacted.
There is no fixed 20% limit, but it cannot exceed same-day expected inflows.
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