Securities and Exchange Board of India has decided to introduce the concept of ‘swing pricing’ for all open-ended debt mutual fund schemes except overnight funds, gilt funds and Gilt with 10-year maturity funds. This move is aimed at discouraging large investors from sudden redemptions. The framework will be applicable from March 1, 2022.

Swing pricing is a mechanism by which fund houses can adjust a scheme’s net asset value (NAV) in response to the flows into or out of the fund. units. When swing pricing is triggered on account of higher-than-average inflows or redemptions, the NAV of a scheme gets adjusted up or down, resulting in the investor subscribing or pulling out bearing the trading costs rather than existing unitholders.

The regulator has not decided to implement it only on redemptions above Rs 2 lakh from the scheme.
To begin with, the swing pricing framework will be made applicable only for scenarios related to net outflows from the schemes.

“This mechanism will reduce the impact of large outflows on the remaining investors. It will help increase confidence in debt funds,” said the CEO at a domestic fund house.

The mechanism will be a hybrid framework with a partial swing during normal times and a mandatory full swing during volatile times for high-risk open-ended debt schemes.

“All AMCs shall make clear disclosures along with illustrations in the SIDs including information on how the swing pricing framework works, under which circumstances it is triggered and the effect on the NAV for incoming and outgoing investors,” said the circular.

For the purpose of determining market dislocation, AMFI shall develop a set of guidelines as part of recommendations to SEBI. The regulator will decide whether to accept the suggestions or not.