The SECP is looking to bring swing pricing to the mutual fund industry. It could have ripple effects for the stock market

Mutual funds investing in the capital markets of a country are beneficial for everyone. Mutual funds are a very important conduit as they are able to pool together the funds of smaller investors together. Once they are able to gather all these funds, the funds are able to invest in asset classes that the individual investors cannot do on their own. For this service, they charge a management fee based on the assets held under their management.

Due to the size of investments that the funds are able to make, they also have the ability to move markets and take them into a direction that their investment mandate dictates them to do so. In a developing capital market like Pakistan, this sway over the markets becomes more pronounced. With each investment being made or being withdrawn, there is a likelihood that the market would not be able to absorb the shock of a large position being bought or being dumped.

This is not to say that the funds are looking to make a huge splash by themselves. The goal of the fund is to be able to get in and out of their position with the least amount of market impact possible. However, the ripple effects of any move they make is expected to reach much wider and deeper than they would want.

When things are moving under their normal circumstances, the funds are given to the asset management company over a long period of time and these funds are raised before any investment is carried out. Once most of these funds are locked in, the fund manager would start to deploy these funds into investments in the manner set out by the investment mandate and as discussed in the fund manager meetings. This allows for the impact of any such investment to be minimized as it is spread out. 

The impact becomes magnified in the case of volatile markets which lead to investors panicking and looking to redeem their investment back. The recent conflict in Iran gives the perfect example of this. When the market crashes by almost 10% in a day, many investors feel that they need to take out their investment before it loses more value the next day. In such a situation, a run is triggered where massive redemptions start to take place.