Side Pocketing:: A win win situation for all?
The term side pocketing is relevant to you if you are a debt fund investor or planning to be one.
Background Story
♦ On January 24 2020 Franklin Templeton Mutual Fund side pocketed its five schemes consisting of bonds from Vodafone Idea limited.
♦ The move was backed by SEBI because it was a equal and opposite reaction of the action of credit rating agency Crisil.
♦ Crisil downgraded it’s rating on nearly 3500 crore worth non convertible debentures from BBB- to BB+ pushing it in the non investment grade category calling the bonds a member of high risk profile category.
♦ The bonds turned into bad assets from good one making provision for the loss necessary.
♦ The investors in concern would have sold the assets at a loss making it a profitable venture for the future investors if the debt is recovered later.
♦ EBI jumped into the scene to and asked the mutual funds companies to enforce Side Pocketing.
The definition of Side Pocketing remains blurred screaming for explanation –
⇒ A ‘side pocket’ option allows a mutual fund house to separate bad assets or risky ones from other liquid investments in a debt portfolio.
⇒ Original Portfolio gets segregated into two portfolios – Main portfolio and a Segregated portfolio (Locked portfolio).
⇒ Investors like you and me are free to sell the investments from the Main portfolio but the segregated portfolio remains locked for any redemption and purchase keeping the investors interested safe for future recovery.
⇒ The main thing is that your future investments is not exposed to the risk of segregated securities keeping the NAV of the main portfolio intact.
♣ The Tax implications of Side Pocketing with a simple example is a story waiting to be narrated in the next post.
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