Greeting To Our Readers!
SEBI had recently announced Swing Pricing in Debt Mutual Funds. In their consultation paper, they mentioned about the same and said, “the idea behind this is to ensure that the opportunistic actions of a few large and privileged investors don’t impact the remaining unitholders in the debt funds”.
Typically, the regulator has come up with this idea after the pressure that the small investors had to face during the Franklin Fiasco that happened in the year 2020. If we recall, 6 debt schemes managed by Franklin Templeton were wound up suddenly!
Well, let us understand the concept of Swing Pricing, how will it be applicable, and how will it be beneficial to debt investors!
Key Takeaways!
1. SEBI proposed Swing Pricing for debt mutual funds on their consultation paper a few days back.
2. The idea behind the Swing Pricing proposal is to ensure that sudden inflow or outflow by large and privileged investors don’t impact the remaining unitholders in the debt funds.
3. Swing Pricing is a manual adjustment made to the NAV of the scheme, at the time when any debt fund scheme faces a large amount or a large number of redemptions suddenly!
What Is Swing Pricing?
Swing Pricing is basically a kind of manual adjustment made to the NAV, at the time when any debt fund scheme faces a large amount or a large number of redemptions suddenly!
What happens when any fund experiences big redemptions suddenly? When opportunistic money flows in or out of the scheme, it basically is done based on the NAV of the scheme. This works better for those who exit the fund but it turns out to be bad news for those small investors who chose to stay invested.
Swing pricing has been introduced in the debt scheme, just to protect the interest of those small investors who chose to stay invested.
The objective on which swing pricing is to pass on any additional transaction costs arising from large inflow or outflow to large opportunistic players.
How does Swing Pricing work?
Let us understand it through an example. Consider a scheme with NAV at Rs 20. Some large institutional or individual investors have somehow access to the information related to the scheme, which makes them feel, either to withdraw large chunks of the amount or invest large amounts.
This sudden and untimely inflow or outflow in the fund, by large investors of the fund, might cause a scheme to sell its most liquid securities. This will be left behind small investors with some irrelevant or illiquid securities that eventually could harm their investment.
In such a scenario, the mutual fund may decide to impose swing pricing. That is the redeeming investors, would not be able to complete transactions at the current NAV, instead, they will have to withdraw at 2% low than the current NAV!
How Swing Pricing Is Going To Benefit Investors?
Typically, in situations when the fund managers of debt schemes will look that there are large transactions from the fund, they will inform the fund house. Taking the action fund house will be able to put on swing pricing, that will automatically pass on the costs of sudden flows to the investors responsible.
Eventually, investors who chose to remain invested in the scheme will not have to face the damage to their investment because of these sudden opportunistic money outflows.
Let Us Sum Up!
Typically swing pricing in debt funds will act as a deterrent for large investors and will make them realize that their sudden transaction in the fund can have impacts on the daily NAV of the fund, which could further impact the small investors in the fund.
Once they realize it, it's obvious that next time before deciding their sudden transaction in the fund, they will have a second opinion. Basically, it’s a move in the right direction, how much will it be effective will only be realized after some time!
Till then keep reading our article and stay updated with the latest news about Mutual Funds!
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).