Swing Pricing In Debt Funds: Major Things To Know

The Securities Exchange Board of India (SEBI) has introduced swing pricing in bond funds to shield debt fund investors from big redemptions by other investors.

The Indian Association of Mutual Funds has been asked to propose broad parameters for determining swing pricing thresholds and an indicative swing threshold range for normal times. For the same, asset management firms (AMCs) are permitted to have additional parameters.

Except for overnight funds, gilt funds, and gilt funds with a 10-year maturity scheme, the regulator has established the swing pricing structure for bond fund units. With effect from March 1, 2022, this circular will be implemented.

What is Swing Pricing in mutual funds?

Swing pricing is when a fund's net asset value (NAV) is adjusted to pass on trading charges to customers who purchase and sell inside their accounts. Its purpose is to shield long-term shareholders from the fund's transaction activity eroding the value of their accounts.
If a fund's net inflows or withdrawals surpass a certain amount defined by the fund provider, swing pricing is used. The supplier calculates the NAV as usual before modifying it by the selected swing factor in all cases.

Swing pricing for normal times

The swing pricing methodology during regular times is as follows:

The MFI will provide broad rules for determining thresholds for triggering swing pricing, which the AMCs will follow. AMFI will also give the industry an indication of a swing threshold range at typical times.

In addition, depending on the structure and characteristics of the mutual fund scheme, AMC may be allowed to have other parameters if it so wants. iii. For typical times, AMCs will determine whether swing pricing is applicable and the magnitude of the swing factor based on scheme-specific issues.

Swing pricing for market dislocation

AMFI will establish a set of guidelines for identifying market dislocation and will suggest it to SEBI. SEBI will evaluate if there is a "market dislocation" based on AMFI's recommendation or on its own. When a market dislocation is announced, SEBI will notify investors that swing pricing would be in effect for a set length of time.

The swing pricing structure will be mandated exclusively for open-ended debt schemes excluding overnight funds, Gilt funds, and Gilt with 10-year maturity funds following the declaration of market dislocation.

The schemes stated in para II(b) above will be subjected to a minimum swing factor as follows, and the NAV will be adjusted accordingly.

Within three months of the date of this circular, all open-ended debt schemes except overnight funds, Gilt funds, and Gilt with 10-year maturity funds.

As a result, swing pricing acts as a "circuit breaker" for mutual funds, increasing the cost of departing schemes and preventing major investors from making rapid withdrawals.