Market regulator Securities and Exchange Board of India (SEBI) has allowed mutual funds to create segregated portfolios with respect to debt and money market instruments subject to various safeguards.
"This facility will be available to mutual funds based on credit events. Creating 'segregated portfolio' may be optional for mutual funds, but approval of trustees is necessary for activating such portfolio," SEBI said in a statement.
Creation of segregated portfolio, also known as side pocketing, is a mechanism to separate distressed, illiquid assets from other more liquid assets in a mutual fund portfolio to deal with a situation arising due to a credit event.
Speaking with reporters, SEBI chairman Ajay Tyagi, said, “We will come out with a circular soon which would have adequate safeguards built-in to ensure that this facility is not misused.”
SEBI's move comes in the wake of defaults by Infrastructure Leasing & Financial Services (IL&FS) leading to net asset values (NAVs) of various debt schemes taking big hits. The loss in NAV of debt schemes exposed to debt papers of IL&FS was sharp, more than 8% in some cases.
Several mutual fund (MF) schemes hold the debt papers of IL&FS, and its subsidiaries, in large numbers. The total amount of currently outstanding debt papers held by MF schemes was valued at around Rs2,400 crore as at end-August, before the downgrade.
With a segregated portfolio, SEBI feels that investors who may take the hit when the credit event happens will get the upside of future recovery.