homepersonal finance NewsSebi rolls out 'swing pricing mechanism' for open ended debt funds; here's what it means for investors?

Sebi rolls out 'swing pricing mechanism' for open-ended debt funds; here's what it means for investors?

By Anshul  Sept 30, 2021 4:46:06 PM IST (Published)

The new framework, to be applicable from March 1, 2022, is aimed at ensuring fairness in the treatment of entering, exiting and existing investors in mutual fund schemes, particularly during the market dislocation.

Capital and commodities markets regulator Securities and Exchange Board of India (Sebi) has recently decided to introduce a 'swing pricing mechanism' for open-ended debt mutual fund schemes. The new framework, to be applicable from March 1, 2022, is aimed at ensuring fairness in the treatment of entering, exiting and existing investors in mutual fund schemes, particularly during the market dislocation.

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While the new norms speak of debt fund investors' interest, the term may look new to many and hence it’s important to understand the mechanism in detail.
So, what exactly is meant by it and how will it affect debt funds?
Swing pricing generally refers to a process for adjusting a fund's net asset value (NAV) to effectively pass on transaction costs stemming from net capital activity to the investors concerned.
Often, the exit of large investors during a market panic leads to a significant drop in NAVs. As a result, investors who remain invested in the fund are at a disadvantage. To penalise investors who are going out that day, the AMC will adjust the NAV downwards and ensure that the trading costs are borne by the exiting investor.
Speaking at length to CNBC-TV18, Prateek Singh, Founder and CEO at LearnApp.com said that under this mechanism, the fund will adjust the NAV up or down to effectively pass on the transaction costs arising from investors moving in and out of the scheme.
"Also, AMCs are required to mention in their Scheme Information Document (SID) when the swing pricing framework will be triggered. So, when it is triggered (be it a normal time or market dislocation), both the incoming and outgoing investors shall get NAV adjusted for swing factors," Singh said.
In this way, a fund can pass on to first movers the cost associated with their trading activity and protect existing shareholders from dilution. This reduces the possibility of a vicious cycle wherein falling prices prompt more investors to bail out, putting further pressure on the NAV.
Will there be an exemption to this mechanism?
All the open-ended debt schemes (except overnight funds, Gilt funds and Gilt with 10-year maturity funds) will have to incorporate the provision. It will be made applicable to all unitholders at PAN level with an exemption for redemptions up to Rs 2 lakh for each mutual fund scheme for both normal times and market dislocation.
When will it be applicable?
In the case of debt funds, the mechanism will be a hybrid framework with a partial swing during normal times and a mandatory full swing during market dislocation times for high-risk open-ended debt schemes.
This means that when a fund managing certain assets get a redemption request from a large institutional investor, the fund house will first tap into its liquid reserves to meet the redemption request. Swing pricing may get invoked based on the threshold set by the AMC or the industry.
The fund manager will sell the securities in the market. However, the fund manager may not get the desired price for liquidating the security, especially when the market for the underlying security is illiquid. Additionally, the fund will incur trading/transaction cost which will eat up the fund’s return, reflecting in the NAV.
How will investors benefit from this?
According to Singh, the move will discourage large investors from sudden redemptions and protect investors in case of such an order.
"The swing pricing rules will ensure that long-term investors in debt schemes will not be affected by some large investors redeeming their investments," he told CNBC-TV18.
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