SEBI 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.
Sebi has proposed a minimum swing factor of 1-2% for open-ended debt schemes based on their risk profile.
Swing factor is a cost that the exiting investor must pay. It is applied as a percentage of the investor’s holding in the fund. It deters large investors from pulling out in a hurry.
When the swing factor is applied, both the entering and exiting investors will ideally get NAV adjusted for swing pricing.
For instance, if the NAV is reduced from 100 to 99 due to swing pricing, the exiting investor will redeem at ₹99 per unit and the entering investor will get to buy at ₹99 per unit.