Tata Mutual Fund is in the process to create segregated portfolio in its three schemes having exposure to DHFL papers – Tata Corporate Bond Fund, Tata Medium Term Fund and Tata Treasury Advantage Fund.
In fact, the fund house has already sent written communication to investors informing them about side pocketing. Tata MF is the first fund house to avail of side pocketing to segregate its stressed assets after SEBI allowed fund houses to use side pocketing 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 prevalent among hedge funds in developed markets.
With this, investors can exit the schemes without paying any exit load within 30 days ending on June 14, 2019. Also, the fund house has suspended ongoing subscription in the schemes.
It is pertinent to mention here that rating agencies have downgraded long-term rating of Dewan Housing Finance Limited (DHFL) to default 'D' on June 5, 2019.
Here is how side pocketing works:
- Investors redeeming their units will get redemption proceeds based on the NAV of main portfolio and will continue to hold the units of segregated portfolio
- Fund house will allocate equal number of units in the segregated portfolio as held in the main portfolio to all investors in the schemes
- Upon recovery of money from the segregated portfolio, whether partial or full, it will be distributed to the investors in proportion to their holding in the segregated portfolio
- Fund house will enable listing of units of segregated portfolio on the recognized stock exchange within 10 working days of creation of segregated portfolio and also enable transfer of such units on receipt of transfer requests
- AMC will disclose separate NAVs of segregated and main portfolios from the date of creation of segregated portfolio
- Once the segregated portfolio is created, no subscription and redemption will be allowed in the segregated portfolio of the schemes
