Segregated portfolio, Indian mutual funds

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A segregated portfolio in the context of Indian mutual fund regulation is a sub-portfolio created within a debt scheme to isolate a distressed or defaulted security from the rest of the scheme’s assets. SEBI formally permitted and defined the segregated portfolio structure through circular SEBI/HO/IMD/DF2/CIR/P/2018/160 dated 28 December 2018, the same circular that introduced the side-pocketing framework for debt mutual funds. The segregated portfolio is the structural vehicle through which side-pocketing is implemented: the “main portfolio” (also called the “continuing portfolio”) holds the performing assets, and the “segregated portfolio” holds the distressed security. Both portfolios are maintained as sub-sets of the same mutual fund scheme; they are not separate schemes.

The framework is embedded in the SEBI (Mutual Funds) Regulations, 1996 and is regulated by the SEBI Investment Management Department.

Structure

When a segregated portfolio is created:

  • The scheme continues under its existing ISIN/scheme code but with two distinct portfolios.
  • Main portfolio ISIN: the original scheme ISIN; redemptions continue on the basis of the main portfolio NAV.
  • Segregated portfolio ISIN/units: a new unit series is created for the segregated portfolio; units are allotted to existing investors pro-rata on the date of the credit event.

Both portfolios share the same trustee, AMC, custodian, and registrar.

Main portfolio NAV

Computed daily on the basis of the market value of the performing securities remaining after the distressed security is removed. Published on the AMFI website by 11 PM (or by 9 AM for overnight and liquid funds under the SEBI NAV applicability rule 2021).

Segregated portfolio NAV

Computed daily on the basis of the fair value of the distressed security (using the valuation norms prescribed by SEBI for distressed/defaulted instruments). In practice, immediately after creation, the segregated portfolio NAV reflects a steep haircut (often 50–100 per cent of face value) in line with the probability-weighted recovery estimate. The riskometer for the main portfolio is updated separately; the segregated portfolio always carries a “Very High” risk label.

Unit allotment and transferability

On the date of creation:

  1. Each existing investor in the scheme receives a proportional allotment of segregated portfolio units. These are credited to the investor’s demat account (if units are held in demat form) or reflected in the statement of account.
  2. Segregated portfolio units are listed on the Bombay Stock Exchange (BSE) and/or the National Stock Exchange (NSE) within 10 business days of creation.
  3. Investors may sell their segregated portfolio units on the exchange at the prevailing market price (which typically reflects a discount to recovery expectation given thin volumes).
  4. No fresh subscription is permitted into the segregated portfolio.

Expense ratio and fees

No additional management fee or TER may be charged for the segregated portfolio. The existing TER slab of the scheme is applied to the combined assets (main + segregated portfolio). SEBI introduced this safeguard to prevent AMCs from profiting on distressed assets by charging incremental fees.

Recovery and termination

When any amount is recovered from the issuer of the distressed security:

  1. The recovered amount is credited to the segregated portfolio.
  2. The AMC distributes the recovery to all segregated portfolio unitholders on a pro-rata basis (as a deemed redemption at the recovered per-unit amount).
  3. If full recovery is made, the segregated portfolio is wound up automatically.
  4. If the security is completely written off with zero recovery, the segregated portfolio is terminated with zero distribution.

Disclosure obligations

AMCs must:

  • Communicate the credit event and segregated portfolio creation to all investors within one business day (email/SMS/AMC website).
  • Publish the segregated portfolio NAV daily on the AMFI website alongside the main portfolio NAV.
  • Disclose the name, ISIN, face value, and market value of the distressed security.
  • Update the Scheme Information Document and Statement of Additional Information to reflect the segregated portfolio within 30 days.
  • Submit monthly reports to SEBI on recovery status.

Multiple segregated portfolios

A single scheme may have more than one segregated portfolio if separate credit events occur in different securities. Each segregated portfolio is maintained independently with its own ISIN/unit series and NAV computation. As of 2024, SEBI’s Master Circular confirms that there is no explicit numerical limit on the number of simultaneous segregated portfolios in a single scheme.

Tax treatment

Taxation of segregated portfolio units in the hands of investors follows the same rules as debt fund units (or equity fund units, if the parent scheme qualifies as equity-oriented):

  • The date of acquisition of segregated portfolio units is deemed to be the date of acquisition of the original scheme units (not the date the segregated portfolio was created).
  • Any recovery distribution is treated as a redemption for tax purposes in the year received.
  • Capital gain (short-term or long-term, depending on the holding period from original acquisition) applies on the recovery amount.
  • Post the Finance Act 2023 amendments, gains on non-equity-oriented debt fund units are taxed as income (not at concessional LTCG rates). See SEBI debt MF tax 2023.

Investor protection context

The segregated portfolio mechanism is one of a cluster of SEBI-mandated investor protection tools for debt mutual funds, alongside:

See also

References

  1. SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2018/160, 28 December 2018.
  2. SEBI Master Circular SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/137, 27 May 2024.
  3. SEBI (Mutual Funds) Regulations, 1996, as amended.
  4. AMFI, “Guidance on Segregated Portfolios”, amfiindia.com.

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The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

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