InvestorQ : Can you tell me what is swing pricing for debt funds all about and how it impacts investors?
Chandralekha Desai made post

Can you tell me what is swing pricing for debt funds all about and how it impacts investors?

NISHA Nayak answered.
12 months ago

Here are some highlights of the Swing pricing mechanism proposed by SEBI.

· The proposed swing pricing framework for debt funds will be effective from March 2022 onwards. AMFI will work out modalities of launching swing pricing for debt funds in consultation with the asset management companies and seek SEBI approval.

· Swing pricing intends to protect the interest of small investors in debt funds so that the volatility does not cause unnecessary NAV erosion for them. In times of market dislocation, loyal investors who stay back in the fund suffer the most.

· This is a specific problem in the case of credit risk funds defaults by credit risk funds led to huge losses for small investors and the flow volatility and illiquidity only worsened the situation. That can be mitigated if not avoided for small investors with swing pricing.

· In the swing pricing model, the exiting or entering investors will pay the price for redemptions and inflows during such disruption. So, well informed investors can just bunch out or bunch at the cost of small investors who are staying back.

· Swing pricing will adjust the NAV of exiting and entering investors in disruptive times so that the staying investors are not affected by the volatility. Swing pricing will be implemented for normal times, at AMC discretion, and ,mandatory for disruptive times.

· Swing pricing during dislocation is defined based on Macaulay Duration or MD of the fund and the credit risk. To begin with, the disruption will only imply a surge in outflows. Other kinds of disruptions will be added along the way.