EXPLAINED | What T+1 settlement means for stock and mutual fund investors

Capital markets regulator Securities Exchange and Board of India (Sebi) has plans to move Dalal Street to an instantaneous system of trade settlement known as “T+1” in phases. What a T+1 system essentially means is that trade-related settlements will be completed within one day from the day of transaction.  

A long way  

Until 2001, the Indian equity market had a weekly settlement system — meaning any security transaction took one whole week to settle. The market then moved to a T+3 system, and finally to T+2 in 2003.  

What’s in it for the investor? 

Instant settlement is a positive development for the Indian stock market and mutual fund investors, according to Arvinder Singh Nanda, Senior Vice President at Master Capital Services, as it will increase liquidity, reduce risk and improve efficiency. 

In January 2023, India moved all blue-chips to a T+1 settlement system, from a T+2 one. 

Sebi has announced plans to move to a T+1 settlement cycle for all scrips from October 1, 2023. 

How will the shift to T+1 settlements impact the stock market?  

According to Nanda, a T+1 settlement will help in increasing liquidity in the stock market by allowing investors to buy and sell shares more quickly. Investors will no longer have to wait two days (under the T+2 system) to receive the proceeds from a sale or to purchase shares already bought.  

"Brokers will also benefit from faster settlement of funds and faster churning of funds. This move will bring down the overall settlement risk to a large extent," said Mukesh Kochar, National Head-Wealth, AUM Capital. 

How will T+1 impact the mutual fund universe?  

Mutual funds will receive the proceeds from their redemptions more quickly as the exchange settles in a T+1 system, say experts. Currently, equity mutual fund investors get redemption proceeds in a T+2 system.  

Once the new system is fully implemented, this cycle will also reduce to T+1, benefitting mutual fund investors. 

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