In a move aimed at safeguarding small investors, the Securities and Exchange Board of India (SEBI) has implemented a swing pricing mechanism in open-ended debt mutual funds.

Swing pricing is a mechanism by which redemption costs are apportioned among those unitholders whose trades impacted the net asset value (NAV).

The mechanism is designed in such a way that the remaining unitholders don’t have to bear all the costs of the redemptions made by a select few.

In a situation where there is a liquidity crunch, the swing mechanism effectively ensures that those redeeming their monies are charged for the redemptions, thereby seeking to dissuade them from doing so.

Often, due to low liquidity, fund houses have to sell their investments to meet redemption demand this leads to a fall in the NAV of the fund

Joydeep Sen, a corporate trainer and author, provides an overview of the swing pricing mechanism, highlighting its benefits for protecting small investors.

Additionally, CNBC-TV18's interview with Nirav R Karkera, Head of Research at Fisdom, delves into the importance of understanding the cash position in mutual funds.

Karkera emphasises that this is a critical metric for investors, as it can significantly influence the stability and performance of the fund.