Swing Pricing Framework: When there is a lot of volatility in the market, big investors start withdrawing their capital from the fund. This has an effect on the NAV (Net Asset Value) of the fund and it gets reduced, causing a loss to the investors who remain in the fund. Market regulator Securities and Exchange Board of India (SEBI) introduced the swing pricing framework last month to avoid crashing the NAV of a fund scheme and prevent large outflows in volatile markets.
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. This framework will be effective from 1 March 2022 next year.
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Investors will get such benefit
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, this range will also decide. Asset Management Companies (AMCs) will have to decide what the AMFI will 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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