Interesting development. SEBI now allows side-pocketing in mutual funds. To give you a gist, let’s take the example of IL&FS. Many mutual funds which were holding IL&FS paper marked down the value and some cases wrote off the value of the paper. The new system allows the AMC to sperate this paper from the main fund and split the NAV, hence the term “side-pocket”. The risky portfolio that will be separated consisting of the illiquid/default securities will have a separate NAV but won’t be open for subscriptions or redemptions.
What this allows the AMC is to reduce the redemption pressure. And secondly, all investors including the institutional investors will be treated on par. This also allows the AMC to continue running the fund without having to stop inflows, which AMCs like Principal and Motilal did during the IL&FS crisis.
“The risky portfolio that will be separated consisting of the illiquid/default securities will have a separate NAV but won’t be open for subscriptions or redemptions.”
You cannot. So, the risky paper in a portfolio will be separated into a separate portfolio which will have it’s own NAV. No subscriptions and redemption will be allowed. It will be business as usual for the normal fund.
If you wish to exit, then you can exit the main fund but you will still hold the units of the bad portfolio. This is much better then the current scheme of things. Today, assuming that Liquidfund A has a paper which went bad, then the NAV drops and if you sell, you will have no claims on the bad paper. If that paper is made good, then the existing investors in the fund will get the proceeds.
In the new scheme of things however, even if you exit the main fund, you will still have units in the bad portfolio. And if the company makes good, then you will receive your money.
Also, SEBI has just outlined the proposal and there is no draft with fine print yet.