SEBI has allowed debt mutual funds to have a “side pocket” that will allow fund managers to segregate their holdings .
A mutual fund side pocketing helps separate risky assets from other investments and cash holdings. It ensures that the money invested in a mutual fund liquid scheme, which is linked to stressed assets, gets locked, until the fund recovers the money from the company. Investors can redeem the rest of their money.
Side Pocketing stops redemption pressure and prevent fund managers from selling the liquid assets at distress price .
Help that mutual fund side-pocketing will provide to retail investors
Once the affected papers—the ones facing a default—are segregated from the rest of the holdings, there will be two sets of net asset values for the mutual fund scheme.
On segregation ,investments in the toxic asset will be closed for subscription, while investors can continue to subscribe to or redeem part of their investment in healthy assets.
In the absence of segregation in a crisis situation institutional investors have the first right to redemptions and retail investors are stuck with toxic assets, the segregation will help avoid such a situation .
Uniform valuation methodology for pricing of corporate bonds which shall be followed uniformly across all the mutual funds will soon been released by SEBI
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