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Creation of segregated portfolio in mutual fund schemes

Siddhi Sharma
/ Categories: Knowledge, MF
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Creation of segregated portfolio in mutual fund schemes

On December 28, 2018, SEBI issued a circular related to the segregated portfolio. The circular asked asset management companies to create a segregated portfolio of unrated debt or money market instruments. And, on November 7, 2019, SEBI issued another circular, which permitted AMCs to create a segregated portfolio. 

What is a segregated portfolio? 

Segregated portfolio means a portfolio of debt & money market instruments, which are unrated and affected by credit event that are segregated from other liquid debt as well as money market instruments. Segregation of unrated debt portfolio is allowed only if the actual issuer defaults in interest payment and principal amount. The reason behind the issuance of this circular is to ensure fair treatment to all investors in case of a credit event. As per SEBI, “Segregated portfolio is created if in case a credit event at the issuer level i.e., downgrade in a credit rating is done by a SEBI registered Credit Rating Agency (CRA) as under: 

1) Downgrade of a debt or money market instrument to ‘below investment grade'. 

 2) Subsequent downgrades of the said instruments from ‘below investment grade'. 

3) Similar downgrades of loan rating.

When a credit event takes place on the same day, AMC should inform AMFI and following that, AMFI must immediately broadcast the information to all AMCs about actual default & issuer. Pursuant to that, AMCs may segregate the portfolio of debt and money market instruments. 

For instance, 

A fund has a NAV of Rs 30 and 10 per cent of its money in the bond of the company, which has defaulted, then NAV will take hit Rs 3 hit i.e., NAV will go down by Rs 3 and will be Rs 27. Then, here, Rs 3 is side-pocketed or segregated. From that day, a fund carries on at NAV of Rs 27 like normal fund as they are of good quality & liquid and bond that has defaulted will be side pocketed. Whenever, the segregated fund recovers the old investor, who was invested on the day of default, will be entitled to the benefits. 

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