InvestorQ : What is the swing pricing in debt funds introduced by SEBI?
divya Sing made post

What is the swing pricing in debt funds introduced by SEBI?

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Ishita Jain answered.
11 months ago
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It was a common problem for long-term investors in a debt scheme to experience volatility as a result of large investors redeeming their investments. To benefit long-term investors, SEBI has introduced swing pricing in debt funds. The swing pricing will work for all the bond funds except gilt funds, overnight funds, and gilt funds with 10-year maturity schemes.
The announcement is in accordance with SEBI’s consultation paper on swing pricing floated in July 2021.

As per that document, the suggestion, now introduction, is aimed at ensuring fairness in the treatment of entering, exiting, and existing investors in mutual fund schemes, particularly during market dislocation. The mechanism of swing pricing will be a hybrid framework with a partial swing during normal times and a mandatory full swing during market dislocation times for high-risk open-ended debt schemes.

Earlier, when fund houses used to liquidate their investments prematurely to meet redemptions due to low liquidity, it resulted in a sharp decline in the bond scheme’s net asset value (NAV). This forced the investments of long-term investors to decrease sharply in their value if they did not exit prematurely. Now, with the introduced swing pricing framework, when swing pricing framework is triggered, and swing factor is made applicable (for normal time or market dislocation), both the incoming and outgoing investors shall get NAV adjusted for swing factor.

SEBI has given a choice to Asset Management Companies to opt for the swing pricing in normal times but has asked them to define broad parameters for determining thresholds for triggering swing pricing. However, it is mandatory for AMCs to incorporate swing pricing into all open-ended bond funds. Furthermore, if the AMC opts for swing pricing, they are required by SEBI to amend the scheme information document.
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