Market regulator SEBI has proposed to introduce swing pricing to protect long-term mutual investors interest from huge investment or redemption made by tactical investors.

A swing pricing adjustment seeks to protect investors in a fund from the impact of significant inflow or outflow from a fund, particularly during market dislocation.

On high risk schemes

Initially, the mandatory swing pricing mechanism is proposed for open ended debt schemes which have high or very high risk on the risk-o-metre. Subsequently, it will be implemented in other equity schemes.

The secondary bond market in India is not as liquid as the equity market. Further, liquidity is concentrated in high quality paper and during market dislocation very high risk aversion is observed.

Last year, Franklin Templeton had to suspend trading in six of its debt schemes due to market dislocation amid peak Covid crisis. However, select investors redeemed their invest before it was suspended completely.

During market dislocation, SEBI will prescribe levy of minimum swing factor and mutual funds can levy higher swing factor to protect investors interest.

NAV to be mark up or down

SEBI will determine ‘market dislocation’ either based on Association of Mutual Funds in India’s recommendation or based on combination of various factors. Once market dislocation is declared, it will be broadcast that swing pricing will be applicable for a certain period.

It is proposed to mandate swing pricing for high risk open ended debt schemes during market dislocation, as these schemes carry high risk securities compared to other schemes which possibly have higher costs of liquidation.

When swing pricing mechanism is triggered and swing factor is made applicable, both new and existing investors will get NAV adjusted for swing pricing.

To incentivise existing investors and impose additional cost on impulsive investors, SEBI has proposed to adjust NAV downwards during times higher net outflows above the swing threshold and lower NAV is offered to the entering investors during such times.

Redemptions

To keep retail and senior citizens insulated from swing prices, SEBI has proposed to exempt redemptions up to ₹2 lakh for all unit holders and up to ₹5 lakh for senior citizens.

SEBI has proposed to adopt a hybrid model of partial swing during normal times and a mandatory full swing during times of market dislocation. At this stage, it is proposed to implement the framework of swing pricing only for open ended debt schemes. During normal time swing pricing will be optional based on pre-determined minimum swing threshold and maximum swing factor.

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