Swing Pricing – This was long called for to protect investor interests

%name Swing Pricing   This was long called for to protect investor interests

During last week, SEBI announced that swing pricing for debt funds would be applicable from March 2022 onwards. This proposal was first put out in July and SEBI has asked AMFI to work out the modalities of launching swing pricing for debt funds. What does this mean?

What is swing pricing all about?

Swing pricing is meant to protect the interest of small investors in debt funds.  It happens quite often that debt fund NAVs may fall sharply due to disruptive reasons. As a result, the loyal investors who stay back in the fund see a sharp erosion of their NAV. This was most pronounced in the case of the credit risk funds about a year back when there were scores of defaults by credit risk funds leading to huge losses to small investors. Even in the Templeton case, the investors who had stayed invested were the ones to eventually bear the losses of fund manager indiscretion.

The question, therefore, is who pays the price for redemptions and inflows during the periods of such disruption. Normally, the well-informed investors tend to bunch out or bunch in, and the resultant cost is paid by the continuing investors. Now, swing pricing will change all that by putting such costs on the exiting or entering investors and protect investors who continued to remain in the scheme. This will be done at two levels, but the real test will be how well it is able to handle disruptive flows in debt segment.

How it will be implemented

Swing pricing will entail adjusting the NAV for the exiting or entering investors once the disruption is identified. There will be two levels of swing pricing. The regular swing pricing will be applicable on a continuous basis and is at the sole discretion of the AMC. However, the swing pricing during dislocation in the market is defined based on the duration of the fund and credit risk. This will be based on an elaborate swing pricing model that will be proposed by AMFI and approved by SEBI on a case-to-case basis. To begin with, the disruption will be only defined as a surge in outflows. Other kinds of disruptions will be added along the way to make the swing price model more comprehensive over time.

Will swing pricing work?

Global markets have different views about the implementation of swing pricing. For example, swing pricing is adhered to in most European nations. However, the US has never adopted swing pricing model for debt funds. In the Indian context, overnight funds and Gilt funds are excluded, which is the right thing to do. Swing pricing will not address the issue of debt fund defaults. However, it will address the risk of HNI investors making hay at the cost of the small investors. To that extent, swing pricing is surely a worthy experiment. Above all, it will make the debt fund punters a lot more cautious in future!


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