Markets regulator, the Securities and Exchange Board of India (Sebi), deferred the implementation of swing pricing framework for mutual fund schemes to May from March. The decision has been taken based on the request received from the Association of Mutual Funds in India, an industry body for asset management companies in India.

To prevent large or savvy investors from exiting a fund in times of market panic and prevent the collapse in a scheme’s net asset value (NAV), Sebi in September 2021 had introduced swing pricing framework for certain category of open-ended debt MF schemes. Overnight funds, gilt funds and gilt with 10-year maturity funds were exempted from this framework.

The swing pricing mechanism allows fund houses to adjust a scheme’s NAV in response to inflows and outflows, protecting long-term unitholders from value erosion during heavy redemptions.

As per the Sebi rules, while swing pricing will be optional during normal market time, it has been proposed to mandate the mechanism for high-risk open-ended debt schemes during market dislocation (panic situations when liquidity in the market dries up and yields spike) as these schemes carry high-risk securities compared to others that possibly have higher costs of liquidation.

As a relief to small investors, redemptions of up to ₹2 lakh for individuals will not be hit by swing pricing for both normal times and market dislocation.

Swing pricing is already practised in the US, Luxembourg, Hong Kong, France and the UK.

When large outflows happen during times of market stress, the fund manager is forced to sell high-quality and liquid papers to meet redemptions. This leaves other investors with a portfolio of lower-quality and illiquid papers. Thus, investors staying put have to bear the brunt of subsequent defaults.

please find here the circular for swing pricing framework.