Swing Pricing Framework: Capital market regulator SEBI has today announced to implement the swing pricing mechanism from May 1 instead of March 1.
Swing Pricing Framework: Capital market regulator SEBI has announced to implement the swing pricing mechanism on Friday (25 February) from May 1 instead of March 1. This mechanism, which is applicable for mutual fund schemes, has been designed so that big investors do not suddenly withdraw their entire money in the volatile market. SEBI has deferred the decision to implement it from March 1 on the request of AMFI. Last year in September 2021, SEBI had introduced swing pricing mechanism for open-ended debt mutual fund schemes, which was to be implemented from March 1 this year and will now be applicable from May 1.
This framework will have an impact on investors like this
According to the SEBI circular, on implementation of swing pricing, investors will get the NAV during investment and withdrawal of the fund, which is adjusted under the swing factor. When there is panic in the market, then if there is a large withdrawal during that period, then on exit, you will get a lower NAV i.e. the exit charge will increase. This will benefit the investors who remain in the fund.
When there is a large withdrawal under pressure, the fund manager has to sell high quality and liquid papers, due to which the investors who remain in the fund have to be satisfied with low quality and illiquid papers. Due to this, the risk of default of the fund remains in front of the investors to stay in the fund. That is, in a way, this framework has been brought in to discourage heavy withdrawals during volatile market volatility.
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Will be applicable on normal days also
The rule of swing pricing will be applicable not only in volatile market but also on normal days but swing factor will be decided differently in both the situations. The swing factor will be in the range of 1-2 per cent. When the market is very volatile then full swing will be applicable but in normal days partial swing will be applicable. Investors who make large withdrawals from open ended debt schemes with volatile market high risk will get 2 per cent lower NAV.
The rules related to swing pricing will be framed by the Association of Mutual Funds in India (AMFI), under what circumstances it has to be implemented and what will be its parameters. Apart from this, the range will also decide. Asset Management Companies (AMCs) will have to decide what the AMFIs decide, but they will also be allowed to set certain parameters on their own depending on the nature of the fund scheme.
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The impact of the new framework will be on them
This framework will be applicable to open-ended debt funds while overnight funds, gilt funds and gilts with 10-year maturity have been kept out of the framework. Apart from this, there will be no effect of swing pricing on withdrawals up to Rs 2 lakh i.e. small investors will be able to withdraw money whenever they want and their returns will not be affected by swing pricing.
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