The concept of side-pocketing, in the context of mutual funds, has become relevant after the default by IL&FS and certain mutual funds giving negative returns. The negative returns have occurred because a few mutual funds have completely written off their exposure to IL&FS instruments, as a matter of prudent judgement, though Securities and Exchange Board of India (Sebi) rules allow them a much longer time frame.
As per Investopedia.com, “A side pocket is a type of account utilized in hedge funds to differentiate illiquid assets from more liquid investments. Once an investment enters a side pocket account, only the present participants in the hedge fund are entitled to a share of it. Future investors will not receive a share of the proceeds if the asset’s returns get realized.”
