Following the IL&FS fiasco, AMFI has once again batted for the introduction of side-pocketing to mitigate risks in debt funds.
The trade body has requested SEBI that the market regulator should allow fund houses to do side-pocketing in debt funds to mitigate risks in debt funds.
Side-pocketing is a practice in which fund houses can segregate risky assets from the rest of their holdings and cap redemptions. Simply put, fund houses can create two funds one with risky assets where fund house will not allow redemption expecting recovery from stressed assets and another fund with other assets with existing features. This practice is very prevalent among hedge funds in developed markets.
Talking to Cafemutual about the side-pocketing, AMFI CEO, NS Venkatesh said, “We have requested SEBI to review the existing guidelines on debt fund management and see if there is possibility to allow side-pocketing in the Indian mutual fund industry. We believe that the side-pocketing can help fund managers reduce risk in debt funds in case a security defaults. Fund managers can create a separate account of stressed assets and try to recover the amount in the meantime without affecting the entire portfolio of the scheme. ”
In 2016, JP Morgan Mutual Fund has pursued this practice in absence of regulations. Later, AMFI had approached SEBI seeking formal guidelines to create uniform practices across fund houses. However, SEBI had earlier rejected the proposal citing that the practice may encourage fund managers to take undue risks.
