Swing Pricing for Mutual Funds

Subject : Economics

Context: The markets regulator has floated the concept of swing pricing in debt mutual funds, which would kick in at times of high stress.

Concept :

The Securities and Exchange Board of India (Sebi) on Monday proposed a swing pricing mechanism for mutual funds to prevent the collapse in a scheme’s net asset value (NAV) at times of investor exodus.
The 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.
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 in times of market stress.
Even a 10-15% redemption of assets under management in a short span of time can adversely impact the fund.