SEBI has come up with a new regulatory move in the form of debt fund swing pricing. The aim is to protect investor interests. Let’s understand the context and reasons which have warranted this.

Debt funds have seen their fair share of turmoil through the last 2-3 years. There have been credit quality events that affected the debt market as a whole and others that impacted individual funds portfolios. Investors in such funds suffered as portfolio quality declines or market level liquidity dry up.

When debt funds go bad, some suffer more than others

What such events can also trigger is a quick exit by large-sized investors at the slightest sign of stress.

These are informed investors, highly sensitive to the smallest basis point drop which may not bother other investors who remain in the scheme.

However, when large-sized investors exit in a panic, good quality, liquid securities need to be sold to fund the redemptions.

This leaves behind a higher proportion of illiquid securities and securities which are negatively impacted by market events. Thus, leaving existing investors with a disadvantage.

In comes swing pricing

SEBI has now introduced a framework for swing pricing. This is an attempt to penalize such panic selling by large investors. The objective is to ensure that the investors who exit early do not get any advantage by doing so.

The swing pricing adjustment applies solely to exiting investors, for all other purposes the regular NAV of the scheme gets used.

It’s somewhat like an exit load or a deterrent for sudden large exits based either on sharp market movement or on specific scheme portfolio related issues. 

What is debt fund swing pricing?

Swing pricing is an adjustment made to the NAV of a mutual fund scheme in times of extreme adversity.

During times of liquidity stress either in the market as a whole or for specific securities held by a scheme, sometimes large opportunistic money flows out of a scheme and it does so at the NAV.

In the changed framework, SEBI has now allowed for swing pricing, which mandates such large outflows to happen at a price that is 1%-2% below the current NAV.

Swing pricing may be applied universally across debt mutual fund schemes by industry body AMFI in consultation with SEBI in times of a negative market event or individually by asset managers where there is an adverse situation for a specific scheme.

How does debt fund swing pricing benefit you?

The good news is that redemptions up to Rs 2 lakhs are exempt from the swing pricing framework. This means that most retail investors will remain unaffected. They will not be affected by NAV changes resulting from sudden large-sized outflows in times of adversity.

Let’s say you have a systematic transfer plan running from a scheme on which swing pricing has been implemented. You will be able to continue the withdrawals at the scheme’s published NAV.

It also acts as a deterrent for large-sized exits, thereby, protecting deterioration in portfolio quality to an extent.

If you choose to remain invested through the turmoil, a good quality scheme is likely to regain lost ground over time. Returns thus tend to normalise. Remain invested rather than selling in a panic, if you don’t need the money.

You still need to be careful

What If redemptions happen regardless and these large-sized investors are willing to exit at the adjusted swing price? Existing investors may be left behind with an illiquid portfolio.

The swing pricing mechanism has no bearing on the portfolio quality; a poor-quality portfolio can impact you negatively with or without it.


This is definitely good news and a step in the right direction. However, as an investor you still need to remain focused on picking debt schemes with good quality portfolios and track record of consistent performance; there is no replacement or protection against poor quality.