Delivery basis

A mutual fund is not allowed to speculate the way a day trader can. One of the rules that enforces this is about delivery.

Every time a scheme buys a security, it must actually take delivery of it. Every time it sells, it must actually deliver it. A scheme cannot buy and sell the same security within the day without ever holding it, the way an intraday trader does.

The rule is not absolute. SEBI carves out three specific exceptions where a scheme may deal without plain delivery both ways — most notably an approved framework for short selling. Outside those named exceptions, delivery is compulsory.

Schedule 6, clause (ix) of the SEBI (Mutual Funds) Regulations states it directly: every mutual fund shall buy and sell securities on the basis of deliveries, taking delivery in every purchase and giving delivery in every sale — subject to three provisos. A mutual fund may (1) engage in short selling, in accordance with the SEBI framework for short selling and securities lending and borrowing; (2) enter into derivatives transactions on a recognized stock exchange, subject to the framework SEBI specifies; and (3) sell a government security already contracted for purchase, in accordance with RBI guidelines.

A related rule in the same schedule bars mutual funds from using scheme funds in carry forward transactions, except in a manner SEBI specifies — reinforcing the same underlying principle that a scheme's positions must be real, deliverable holdings rather than rolled-over speculative bets.

Illustrative — the workbook states the rule as a compliance requirement, not a worked trade.

A large-cap equity scheme buys 10,000 shares of a listed company at Rs 850 each, a trade worth Rs 85,00,000. Settlement follows the exchange's normal cycle, and the shares are credited to the scheme's demat account — actual delivery, exactly as the rule requires.

The same scheme separately runs an approved short-selling programme under SEBI's securities lending and borrowing framework, and sells 2,000 shares of another company, worth Rs 12,00,000, that it has borrowed for the purpose, intending to buy them back later. This is the named exception, not a breach of the delivery-basis rule — because it operates entirely inside the SLB framework the rule itself carves out.

Chapter 4 (Legal and Regulatory Framework) lists this under the investment restrictions in Schedule 6 of the MF Regulations. The workbook's own Chapter 4 sample question tests exactly this point — asking whether "mutual funds can buy and sell securities only on delivery basis" is true, which is true only once the three named exceptions are understood.

• The rule is not absolute "no naked positions ever." It has three specific, named carve-outs: short selling under the SLB framework, exchange-traded derivatives, and RBI-permitted government security sales.
• A scheme cannot day-trade a security outside those exceptions — it must genuinely take or give delivery.
• This is a different rule from the ban on carry-forward transactions, though both express the same underlying principle against undeliverable, rolled-over positions.