SEBI has changed the rules for intraday borrowing by mutual funds. The move gives asset management companies more flexibility when a scheme faces a short cash gap during the day.
At first glance, this may sound like a technical issue for fund houses. But cash flow is an important part of mutual fund operations. A scheme may have large assets but still face a temporary shortage of cash because money has to go out before another payment reaches the fund.
SEBI’s new framework aims to solve this timing problem without allowing mutual funds to take excessive debt. The regulator wants funds to have more ways to handle short-term cash needs, while keeping clear limits around borrowing.
Why mutual funds need short-term cash
A mutual fund does not keep all its money in cash. Most of the money is invested in shares, bonds, government securities and other permitted assets. A scheme keeps some cash for regular expenses and investor needs, but holding too much cash can reduce the amount available for investment.
This can create a timing mismatch.
For example, a scheme may need to pay for securities bought in the market before it receives money from another transaction. A similar situation can occur when investors ask for redemptions. The fund may have enough assets to meet the payment, but the cash may not be available at that exact time.
In such a situation, a short intraday loan can act as a bridge. The scheme can use the money for a few hours and repay it once the expected cash comes in.
The important point is that this is not the same as a mutual fund taking a large loan for several months to increase its market exposure. The purpose is to handle a temporary cash gap.
The earlier borrowing rules
SEBI has always kept tight limits on borrowing by mutual funds. Under the wider borrowing framework, a scheme can borrow up to 20% of its net assets for temporary liquidity needs. Such borrowing cannot continue for more than six months.
The reason is simple. Mutual funds collect money from investors mainly to invest it according to the scheme’s mandate. They are not banks, and borrowing is not supposed to become a regular source of finance.
This makes the regulator cautious about debt.
However, the way markets operate has changed. Securities settlement is now faster, transaction volumes are higher and fund operations have become more complex. Money can leave a scheme at one point in the day and arrive at another.
A framework built around longer-term liquidity needs may not always fit these short cash gaps.
SEBI’s first intraday borrowing framework
In March 2026, SEBI issued a circular on borrowing by mutual funds. The circular also introduced provisions for intraday borrowing.
However, asset management companies raised concerns about how the new system would work in actual market conditions. Some of the rules were seen as difficult to apply to routine fund operations.
SEBI then delayed the implementation of the intraday borrowing provisions. The regulator gave the industry more time to prepare and sought further views on the framework.
In May 2026, SEBI issued a consultation paper on the use of intraday borrowing lines by mutual funds.
The process eventually led to a revised approach.
The July 2026 change
On July 10, 2026, SEBI issued a circular specifically on the intraday borrowing facility for mutual funds.
The new approach widens the situations in which a scheme can use this short-term facility. The permitted uses include investor payouts such as redemptions, IDCW and interest payments. It can also cover investment pay-ins, mark-to-market obligations, foreign exchange settlements and repayment of existing borrowings.
This is important because a scheme may face a genuine cash requirement even when it is not short of assets.
The problem may simply be timing.
A fund could have money due later in the day but need cash earlier. Instead of selling an investment only to meet a few-hour cash gap, it can use an intraday borrowing facility and repay the amount once the expected money arrives.
Expected cash can also matter
One of the important changes is the treatment of expected receipts.
Earlier, the framework focused more narrowly on certain cash inflows. The revised approach gives schemes greater flexibility to consider some expected receipts even when those receipts are not fully guaranteed.
These can include maturity proceeds and receipts from secondary-market settlements, subject to the conditions set by SEBI.
This gives fund managers a better way to assess their actual cash position.
However, it also places greater responsibility on the asset management company. An expected payment is not the same as money already sitting in the bank account. If that payment gets delayed, the fund could still face a cash problem.
That is why SEBI has kept safeguards around the facility.
This is not a new leverage window
The biggest misunderstanding about the change would be to see it as a major relaxation of borrowing rules.
It is not.
SEBI is not allowing mutual funds to freely borrow money and use that money to buy more securities. The main purpose of intraday borrowing is to manage temporary cash mismatches.
The wider borrowing rules remain relevant. Ordinary borrowing by a mutual fund is still subject to the 20% of net assets limit and the six-month maximum period.
Intraday borrowing is treated differently because it is meant to be repaid within the same day.
If the borrowing is not cleared within the permitted period, it can no longer be viewed simply as an intraday liquidity bridge. The normal borrowing framework then becomes important.
Why this can help fund managers
The change can make day-to-day fund management more efficient.
Without a short-term borrowing option, a fund may have to keep extra cash aside to protect itself against possible timing gaps. While this provides a safety cushion, too much idle cash can reduce the amount of money available for investment.
Another option would be to sell securities to create cash.
That may not always be the best choice. The fund could have to sell an asset at an unfavourable price or exit an investment that the manager would rather continue to hold.
A short intraday loan can solve the problem without forcing such a portfolio decision.
This can be especially useful when the cash gap lasts only a few hours.
What about investor risk?
The new facility does not remove the risks associated with mutual funds.
Investors still face market risk, credit risk, interest-rate risk and liquidity risk, depending on the type of scheme they own.
The intraday facility deals with a much narrower issue: the timing of cash flows.
SEBI has also placed responsibility on the AMC for certain costs and losses linked to the use of the facility. The cost of intraday borrowing is to be borne by the AMC rather than passed on to the scheme investors. The same principle applies to losses that arise from delayed or unexpected receivables under the framework.
This gives fund houses an incentive to use the facility carefully.
Why SEBI is taking this approach
The evolution of the rules is important.
SEBI first issued the borrowing framework in March 2026. It then delayed the intraday provisions after industry concerns. The regulator later sought views through a consultation paper before issuing the July 10 framework.
This shows that SEBI is trying to balance two competing needs.
On one side, mutual funds need enough flexibility to deal with real-world cash flows. On the other, investors need protection from excessive borrowing and poor liquidity management.
The new framework tries to sit between these two concerns.
What investors should take away
For most investors, this change will not lead to an obvious difference in their daily mutual fund experience.
There is no new action that an investor needs to take simply because the rules have changed.
The benefit should instead appear in the way fund houses manage their cash. Better access to a short-term liquidity bridge can reduce the need for excessive cash holdings or poorly timed asset sales.
At the same time, investors should not assume that intraday borrowing makes a scheme safer. It is simply another tool available to the fund manager.
The bigger picture
SEBI’s move is best understood as an upgrade to the plumbing of the mutual fund industry.
A fund can be financially strong, hold valuable securities and still face a shortage of cash for a few hours. The new framework recognises this reality.
The regulator has therefore widened the liquidity toolkit while keeping the basic borrowing discipline intact.
The 20% of net assets limit and six-month ceiling continue to matter for ordinary borrowing. Intraday borrowing serves a different purpose. It is designed as a short bridge for genuine cash flow mismatches, not as a way to increase investment leverage.
For mutual fund investors, that distinction is important.
If AMCs use the facility carefully, the change could make fund operations smoother, reduce the need for unnecessary asset sales and improve cash management. At the same time, SEBI’s safeguards are designed to ensure that greater flexibility does not turn into unchecked borrowing.
In simple terms, SEBI is giving mutual funds more room to manage cash, but not more freedom to take debt-fuelled investment bets.
