Home / Mutual Funds / News /  Regulator issues swing pricing rules for debt MFs
Listen to this article

To dissuade large or savvy investors from exiting a fund in times of market panic and prevent the collapse in a scheme’s net asset value (NAV), the Securities and Exchange Board of India (Sebi) on Wednesday introduced swing pricing framework for open-ended debt MF schemes.

Overnight funds, Gilt funds and Gilt with 10-year maturity funds, however, will be exempted from this framework.

Moreover, in a relief for small investors, redemptions of up to 2 lakh for individuals will not be hit by swing pricing for both normal times and market dislocation.  

 “When the swing pricing framework is triggered and swing factor is made applicable (for normal time or market dislocation, as the case may be), both the incoming and outgoing investors shall get NAV adjusted for swing factor," Sebi said in a circular on Wednesday.

To begin with, there will be a partial swing pricing during normal times and a mandatory full swing during market dislocation times for high-risk open-ended debt schemes.

For normal times, the Association of Mutual Funds in India (AMFI) has been tasked by the markets regulator to prescribe broad parameters for determining the thresholds for triggering swing pricing.

The industry body will also suggest an indicative range of swing threshold for normal times.

Moreover, asset management companies (AMCs) have been allowed to decide on the applicability of swing pricing and the quantum of swing factor depending on scheme-specific issues.

For the purpose of determining market dislocation, AMFI will develop a set of guidelines for recommending the same to Sebi. Once market dislocation is declared, the swing pricing will be applicable for a specified period.

The markets regulator in the circular also announced a swing factor in the range of 1-2% that will be applicable to the open-ended debt MF schemes during market dislocation.

Schemes falling in the C-III category, which have maximum credit risk and maximum duration risk, will have a minimum 2% swing, meaning in times of distress, redeeming investors will have to take a 2% lower NAV. Funds will have the freedom to levy a higher swing factor, as well.

Market dislocation generally refers to a panic situation when liquidity in the market dries up and yields spike.

When large outflows happen during times of market stress, the fund manager is forced to sell high-quality and liquid papers to meet redemptions. This leaves other investors with a portfolio of lower-quality and illiquid papers. Thus, investors staying put have to bear the brunt of subsequent defaults.

Therefore, swing pricing works like a “circuit breaker" for mutual funds, as it increases the cost of exiting schemes, discouraging large investors from sudden redemptions.

The framework will come into effect from 1 March 2022.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Recommended For You
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout