From now on, fund houses have to enable the side pocketing provision in their new schemes. A SEBI circular issued today says, “All new MF schemes to be launched after the date of this circular shall have the enabling provisions included in the SID for creation of segregated portfolio.”
Experts feel that the move could encourage fund houses to opt for side pocketing as they do not have to allow a 30-day window to investors who want to withdraw their money without charging any exit load.
Vidya Bala, Founding partner & Head – Research and Product, PrimeInvestor.in said, "Since for the new schemes fund houses are not required to change any ‘fundamental attribute,’ they need not give investors the 30-day window."
Debt guru Joydeep Sen believes that the impact could be limited as the provision applies to new schemes and most fund houses already have a complete line up of products. He said, “While fund houses will not be required to give the 30-day window for the new schemes, one must take note of the fact that most fund houses already have a scheme in most of the 16 debt fund categories available.”
The circular also noted that creation of segregated portfolio will remain optional and at the discretion of the fund house.
Moreover, the market regulator has now permitted side pocketing of unrated debt or money market instruments by mutual fund schemes of an issuer that does not have any outstanding rated debt instruments.
However, for such side pocketing the issuer has to ‘actually default’ on either the interest or principal amount. Earlier, a credit event such as downgrade by a credit rating agency was also considered for side pocketing.
Further, SEBI has asked AMCs to inform AMFI immediately about the actual default by the issuer. Thereafter, AMFI shall immediately inform the same to all AMCs so that they can opt for side pocketing at the earliest.
