Making AMCs run segregated portfolios for retail and institutional investors may be a better idea – REUTERS
SEBI’s proposal to allow debt funds to use swing pricing, a good move but safeguards are needed
Open-end debt mutual funds have gained traction with individual investors garnering ₹14 lakh crore in assets despite the obvious lack of depth and liquidity in the bond markets. The recent episode where scores of small investors were left high and dry by the sudden decision of Franklin Templeton India to wind up six of its debt schemes seems to have prompted the Securities Exchange Board of India (SEBI) to belatedly take up the 2018 report by IOSCO (International Organization of Securities Commissions) on the use of swing pricing.
Given that debt funds are subject to high churn from corporate investors and own illiquid investments even in the best of times, a protection mechanism for retail investors from the flight of smart money is certainly much-needed. But as swing pricing effectively forces investors to bear higher costs for liquidity or investor concentration risks taken on by the fund manager, there’s a moral hazard to allowing the industry free use of this tool. To prevent misuse, SEBI must make sure that large investors do not get advance tip-offs on swing pricing from fund insiders. Liquidity costs are tough to quantify and vigilance may be needed to ensure that funds don’t excessively distort their NAVs under the guise of swing pricing. As retail investors often use debt funds to park emergency money, a higher threshold limit than ₹2 lakh may be needed during market dislocations. Finally, getting AMCs to run segregated debt portfolios for retail and institutional investors may better address many of the challenges associated with asset churn compared to the complexities of swing pricing.