Here Are 3 Important Changes That Will Impact Your Financial Life This May

A lot of changes have happened in the space of personal finance in the month of May.

Here’s a look at the three major ones which will have a major impact. 

Home, car loan set to increase: In the month of April, a few banks, namely, the State Bank of India (SBI), Kotak Mahindra Bank, Bank of Baroda, and Axis Bank increased their marginal cost of lending rates (MCLR). MCLR, which came into effect from April 1, 2016, is the minimum rate below which banks are not permitted to lend. 

SBI raised its MCLR by 10 basis points, while the other three have raised it by five bps, or 0.05 per cent across the board. Effective April 15, SBI’s MCLR stands at 7.1 per cent, 7.3 per cent, and 7.4 per cent for one-, two- and three-year periods, respectively. Axis Bank’s one-year MCLR effective April 18 is at 7.4 per cent, while its two- and three- year MCLR are at 7.5 per cent and 7.55 per cent, respectively. 

For the car and home loan borrowers, the rate of interest will be reset as per the loan agreement. The increase in the interest rate cycle is likely to affect home loans the most, which are now at an all-time low. 

More investment from AMCs in their schemes: According to regulations by the Securities and Exchange Board of India (Sebi), fund houses are now required to invest more in their own schemes starting May. 

AMCs would need to invest in the range of 0.03-0.13 per cent of the asset base in their own schemes in a move to align the interest of the fund houses with the investors. The percentage that needs to be invested would depend on the risk-level of the scheme, which has been categorised into low, low to moderate, moderate, moderately high, high, and very high. 

Swing pricing in mutual funds: In September 2021, Sebi introduced swing pricing mechanisms for open-ended debt mutual fund schemes in a bid to discourage large investors from sudden redemptions in times of crisis, as was seen in 2019 and 2020. 

Debt mutual funds hold debt instruments like bonds, debentures, and commercial papers, which are not as liquid as equity shares. So, if a large redemption order is placed, the debt funds have to either tap into their respective cash holdings, or resort to selling the instruments they hold. This is where swing pricing helps. With the help of swing pricing, the cost of the traded security is adjusted with the net asset value (NAV) of a mutual fund scheme if the order redemption size crosses a specific threshold. For instance, the trading cost incurred is deducted from the NAV of the specific selling unitholder so that the other investors who remain invested do not suffer from a lower NAV due to the high redemption action. So, in essence, there will be two NAVs – the reduced NAV for the selling unitholders, and the other NAV for those who choose to stay invested in the said debt fund.

To know more about the swing pricing in mutual funds, click here 

This swing price was made effective from May 1. To start with, the swing price framework will be made applicable only for cases related to net outflows from the schemes. The mechanism is meant to be a hybrid framework with a partial swing during normal times, and a mandatory full swing market dislocation times for high risk open-ended debt schemes.