SEBI introduces swing pricing mechanism for debt mutual funds

Capital market regulator SEBI has announced swing pricing mechanism for all debt mutual fund schemes in the event of market dislocation. The move is aimed at discouraging large investors from sudden redemptions and protect investors in case of such an order.

The new norms will come into effect from next March.

Swing pricing is a mechanism to apportion the costs of redemption and purchase requests of investors whose large orders cause a dent in the Net Asset Value (NAV). Swing pricing allows a mutual fund to make adjustments to the NAV, so that when large investors stampede out, those left behind do not take undue hits from transaction costs or fire sales.

Swing pricing will be exempted for overnight, gilt and gilt with 10-year maturity funds, and redemptions up to ₹2 lakh for each scheme both in normal and market dislocation times.

FT redemption

Last year, many informed Franklin Templeton investors encashed their debt market investments ahead of liquidity problem. Following this, gullible investors were left to bear the brunt as the fund house subsequently suspended all its six debt schemes due to heavy redemption pressure.

With SEBI new norms coming into force, mutual funds will announce a separate NAVs for investors who redeem and purchase when swing pricing is in force and different NAV for those hold on to their investments.

SEBI has directed industry body Association of Mutual Funds in India (AMFI) to prescribe broad parameters for determining the thresholds for triggering swing pricing within three months.

Indicative range

AMFI should also prescribe an indicative range of swing threshold to the industry during normal times. Additionally, AMC can also have other parameters considering the nature and characteristics of the mutual fund scheme. In normal times, AMCs can decide on the applicability of swing pricing and the quantum of swing factor depending on scheme specific issues after specifying in scheme information document.

For the purpose of determining market dislocation, AMFI will develop a set of guidelines and recommend it to SEBI for consideration. Once market dislocation is declared, it will be notified by SEBI that swing pricing will be applicable for a specified period in open ended high risk and potential high risk debt schemes.

When swing pricing framework is triggered and swing factor is made, applicable all investors will get NAV adjusted for swing factor, said SEBI.