From 1 May, 2022, SEBI will implement swing pricing for mutual fund schemes, aimed at discouraging large investors from sudden redemptions
Interest rates on loans are likely to go up and bank tariffs are set to be changed in May. In mutual funds, the swing pricing mechanism will be implemented and asset management companies will have to start investing more in their own schemes. Here are the key regulatory and operational changes set to start in May.
Home, car loan rates may rise
The State Bank of India (SBI), Axis Bank, Bank of Baroda and Kotak Mahindra Bank increased their benchmark marginal cost of funds-based lending rates (MCLR) in April. SBI raised its MCLR by 10 basis points across all tenures and the other three banks raised it by five basis points. One basis point is one-hundredth of a percentage point.
SBI’s MCLR is 7.1 per cent for one-year tenure, 7.3 per cent for two years, and 7.4 per cent for three years. At Axis Bank, the MCLR is 7.4 per cent, 7.5 per cent and 7.55 per cent for one, two and three years of tenure, respectively.
MCLR is an internal reference rate for banks set by the Reserve Bank of India to help determine the minimum interest rate on various types of loans. The final rate includes risk premium and the spread charged by banks.
For MCLR-linked loan borrowers, the interest rate will be reset as per the loan agreement. In general, MCLR-linked home loans have a reset clause once every six or 12 months after taking the loan. The increase in the interest rate cycle comes after two years of the pandemic, and will especially affect home loans, which are at an all-time low.
Savings, salary account charges
Effective 1 May, 2022, Kotak Mahindra Bank will apply new norms to savings and salary account holders. The bank has increased charges for non-maintenance of minimum balance. It will add Rs 50 to the charge of 5 per cent of the shortfall with a cap of Rs 500 or Rs 600, depending on the type of account.
The bank will also introduce fees for cheques issued and returned for non-financial reasons including incomplete, differing and illegible signatures. Each instance will cost the customer Rs 50.
Charges for cheques deposited and returned as well as the standing instruction failure fee have been increased to Rs 200 from Rs 100 per instance.
Swing pricing in mutual funds
From 1 May, 2022, the Securities and Exchange Board of India will implement swing pricing for mutual fund schemes, aimed at discouraging large investors from sudden redemptions. The new framework, aimed at ensuring fairness in treatment of entering, exiting and existing investors in mutual fund schemes, especially during market dislocation, was to have been applicable from 1 March, 2022, but was delayed to May.
The swing pricing framework is mandated only for high-risk, open-ended debt schemes as they carry high-risk securities compared to others. All asset management companies will have to make clear disclosures, along with illustrations, in the scheme information documents and include information on how swing pricing works, when it is triggered, and the effect on net asset values for incoming and outgoing investors.
Swing pricing will apply to all unit holders at the PAN level with exemption for redemptions of up to Rs 2 lakh for each mutual fund scheme for both normal times and during market dislocation. AMCs must put in place policies and procedures pertaining to swing pricing, which are approved by their boards and trustees.
AMCs to invest more in own schemes
Fund houses will have to invest more in their own schemes from May, as per SEBI regulations. This is aimed at aligning the interests of asset managers with those of their investors. AMCs will invest 0.03 per cent to 0.13 per cent of their asset bases in their own mutual fund schemes. The extent of such investments will vary as per the risk level of the scheme. The risk level will be determined as per the risk-o-meter framework.
AMCs will have to maintain the investments in their own schemes at all times, until the completion of tenure or closure of the scheme. They should ensure that the minimum amount remains invested and should conduct quarterly reviews to ensure compliance.