Mutual Funds side-pocketed-scheme

Side-pocketed scheme

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A side-pocketed scheme is a mutual fund scheme that has invoked SEBI’s side-pocketing framework to isolate stressed credit assets from the main portfolio into a separate segregated portfolio . The side-pocket mechanism protects performing-portfolio investors from credit deterioration in specific holdings.

How it works

Trigger

When an underlying credit asset faces material deterioration (default, severe downgrade), the AMC may:

  • Mark down the stressed asset.
  • Apply for segregated-portfolio creation.
  • Obtain trustee and SEBI approval.

Outcome

Post side-pocketing:

  • Main scheme portfolio continues operations (subscriptions / redemptions allowed).
  • Segregated portfolio is closed (no further subscriptions / redemptions).
  • Existing unit holders receive units in both.

Recovery

The segregated portfolio is held until stressed assets are resolved (IBC, negotiated settlement, etc.). Recovery proceeds distributed when available.

Notable examples

  • IL&FS-affected schemes (multiple AMCs).
  • DHFL-affected schemes.
  • Yes Bank AT1-affected schemes.

Investor implications

  • Receive units in both main scheme and segregated portfolio.
  • Continue normal transactions on main scheme.
  • Recovery distributions taxed as capital gains upon receipt.

See also

External references

References

  1. SEBI (Mutual Funds) Regulations 1996.
  2. AMFI Best Practice Guidelines.

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