SEBI Introduces Swing Pricing in Debt Mutual Fund

On Wednesday, the Securities Board of Exchange India (SEBI) said that the ‘swing pricing’ method shall be introduced for all the open ended debt mutual funds. Gilt funds, overnight funds, and Gilt with 10-year maturity funds shall be excluded from this new application of swing pricing.

SEBI’s circular further clarified that in the initial stage swing pricing structure shall be applied only for the net outflow from the funds and not on the inflows. The new structure of pricing shall be applied from 1st March, 2022.

What is Swing Pricing?

Swing pricing is a mechanism by which the mutual fund provider adjusts the net asset value (NAV) of the fund in such a manner that the trading cost of buying and selling is charged to the respective account. This method of pricing protects long-term investors from the reduction of their NAV due to trading activities of other participants within the same mutual fund.

In the case of high risk open ended debt funds, this mechanism shall be slightly modified to reduce the risk. At the time of market dislocation, compulsorily the full swing shall be applicable whereas, at normal times, asset management companies (AMCs) can use the partial swing method.

Role of AMCs in this context

SEBI is looking forward to protecting the interest of long term investors in debt mutual funds by introducing swing pricing mechanism. The new price structure will ensure fair treatment to entry and exit of investors in mutual fund schemes.

Association of Mutual Funds in India (AMFI) shall be giving guidelines to AMCs for determining the approach towards the application of swing pricing. The body shall advise an estimated swing range limit for the industry to follow during normal times.

The AMCs are flexible to decide when the swing pricing method shall be applied and measure the swing factor based on the specific issues of their mutual fund schemes. The Scheme Information Document (SID) of such a mutual fund scheme shall contain the details of applicability of swing pricing and the quantum of swing factor.

The steps planned to be taken:

To determine the circumstances of market dislocation, AMFI shall form guidelines to recommend SEBI. The SEBI shall then ascertain market dislocation after considering the AMFI’s suggestion.

Once the market dislocation scenario is determined, SEBI shall announce the applicability of the full swing pricing structure for the notified period. On such declaration, full swing pricing shall be compulsorily applicable only to open ended debt funds with high risk.

All open ended debt mutual funds to which swing pricing applies shall include a provision about this mandatory pricing structure in the offer documents. This requirement needs to be fulfilled by AMCs in three months as per the SEBI’s order.

In times when swing pricing structure is applied, NAVs of both, the investors that are entering and exiting the scheme, shall be adjusted according to the swing factor.

Swing pricing shall apply to all mutual fund unit holders across India. Redemptions of up to Rupees 2 lakhs for each scheme shall be exempted. This exemption is applicable during both, normal scenarios and when markets are dislocated.

AMCs shall make all necessary disclosures in SEBI suggested format. Along with SIDs, details must also be disclosed in the abridged summary and yearly reports. It shall also be prominently highlighted on their websites if that mutual fund scheme attracts swing pricing.

Conclusion

To protect the interest of long term investors in open ended debt mutual fund schemes, SEBI is all set to introduce the swing pricing mechanism for fair computation of NAV. Initially, the new price structure will have partial and full applicability based on normal condition or market dislocation. High risk open ended debt mutual fund schemes to follow mandatory full swing during marker dislocation. Swing pricing structure is applicable from March 1, 2022 but the AMCs are required to include provisions relating to the same in their offer documents within three months.

 

FAQs

What is swing pricing mechanism?

Swing pricing is a method by which mutual fund managers adjust the Net Asset Value (NAV) such that

How does swing pricing affect my MF investment?

If you buy and sell less frequently, the NAV of your MF investment shall be higher in the long term. Swing pricing transfers the cost of transactions to the respective accounts that do buying and selling activity. If there are a higher number of transactions in your account, the cost will be higher and your NAV will reduce by that much amount.

What is market dislocation?

Market dislocation is the situation in financial markets when prices of the assets move unreasonably away from its absolute or intrinsic value. This usually happens under stressful situations. We recently witnessed market dislocation in the first half of 2020 due to COVID-19 pandemic.