Sebi offers swing pricing to control erosion of net asset value in MFs
The Securities and Exchange Board of India (Sebi) on Monday proposed a swing pricing mechanism for mutual funds to avoid a collapse in the net asset value (NAV) of a system during an investor exodus.
The mechanism allows fund companies to adjust the net asset value of a system in response to inflows and outflows, thereby protecting long-term unitholders from erosion in value during large redemptions.
The move is part of a series of reforms aimed at protecting the interests of investors following the April 2020 liquidation of six debt funds by Franklin Templeton Asset Management (India) Pvt. Ltd.
“Swing pricing is a potential risk mitigation measure for any product with liquidity risk. This is particularly acute with open-ended debt mutual funds, especially during times of market stress. Even a redemption of 10-15% of the assets under management in a short period of time can have a negative impact on the fund, ”said Kaustubh Belapurkar, Managing Director – Research, Morningstar Advisor India.
While swing pricing will be optional during the normal market period, Sebi proposed to mandate the mechanism for high-risk open-ended debt programs during market dislocation (panic situations when market liquidity dries up and as returns rise) because these programs carry risky securities relative to others that potentially have higher liquidation costs. Swing pricing is already practiced in the United States, Luxembourg, Hong Kong, France and the United Kingdom.
“During the market dislocation, the applicability of the minimum swing factor will be as stipulated by Sebi, which will be based on risk. Beyond that, the asset management company (AMC) may choose to levy a higher swing factor if it considers such a factor to be in the best and fair interest of its unitholders, ”said Sebi in the document, which was posted on the Regulator’s website for stakeholder comments.
Sebi proposed a minimum swing factor of 1 to 2% for open-ended debt programs depending on their risk profile.
The swing factor is a cost that the outgoing investor has to pay. It is applied as a percentage of the investor’s participation in the fund. This deters large investors from rushing out.
When the swing factor is applied, incoming and outgoing investors will ideally get an adjusted NAV for swing pricing.
For example, if the NAV is reduced from 100 to 99 due to swing pricing, the exiting investor will buy back from ₹99 per unit and the incoming investor will be able to buy at ₹99 per unit.
To relieve small investors, redemptions up to ₹2 lakh for all unitholders and up to ₹5 lakh for seniors will be exempt from the swing pricing mechanism.
Sebi will also examine whether swing pricing can be applied to equity programs, hybrid programs, solution-oriented programs and other programs such as index funds or exchange-traded funds.
“There are some drawbacks to this (swing pricing). This may deter companies from investing in smaller debt funds because the threshold for implementing swing pricing will be lower there. For example, a threshold of 5% is ₹5 crore in one ₹100 crore funds, while it is ₹50 crore in one ₹Fund of 1,000 crores. Corporate treasuries usually have large amounts to invest. Second, companies could try to play with the system. If the threshold is announced at 5%, people will try to redeem say 1% per day instead of 5% in a single day, ”a debt fund manager said on condition of anonymity.
Of course, internationally, in the case of many fund houses, the thresholds are confidential in order to avoid any attempt to avoid a price variation by subscribing or redeeming an amount just below the threshold.
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