Side-Pocketing on WebNotes

Segregated portfolio in mutual funds

Tue, 19 May 2026 00:00:00 +0000

A segregated portfolio is the operational vehicle through which SEBI’s side-pocketing framework allows AMCs to separate stressed credit assets from the main scheme portfolio. Introduced under the 2018 SEBI framework following events like the JPM Amtek incident (2015) and the broader IL&FS default (2018) , segregated portfolios protect performing-portfolio investors from being affected by isolated credit events.

For Indian retail investors holding debt mutual funds that experience credit deterioration in specific holdings, the segregated portfolio mechanism ensures that:

Side-pocketing framework for Indian debt mutual funds

Sat, 16 May 2026 00:00:00 +0000

The side-pocketing framework for Indian debt mutual funds is the SEBI regulatory mechanism, introduced through SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2018/160 dated 28 December 2018, that permits asset management companies (AMCs) to separate distressed or defaulted debt securities from the rest of a mutual fund scheme’s portfolio into a distinct segregated portfolio, ring-fencing the credit event’s impact on the main portfolio and preventing the adverse selection dynamic of investors with knowledge of the distress redeeming first at the expense of remaining unit-holders. The framework was SEBI’s policy response to the September to October 2018 IL&FS group defaults, which had exposed a substantial gap in the Indian mutual fund regulatory framework: in the absence of a side-pocketing mechanism, AMCs faced an untenable choice between meeting redemptions by selling performing assets (concentrating the distressed exposure in the residual portfolio) and suspending redemptions (a more disruptive action under Regulation 39). The 2018 circular provides an intermediate mechanism that protects continuing investors while preserving the ability to recover from distressed holdings.

Segregated portfolio, Indian mutual funds

Tue, 12 May 2026 00:00:00 +0000

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.

Side-pocketing introduction in Indian mutual funds (2018)

Tue, 12 May 2026 00:00:00 +0000

Side-pocketing, formally termed “segregated portfolio” in Indian regulatory terminology, is a mechanism that allows a mutual fund scheme to separate debt or money market instruments affected by a credit event into a distinct sub-portfolio, ring-fencing the impaired assets from the main portfolio and protecting ongoing investors from dilution by redemption outflows. The mechanism was introduced in India by the Securities and Exchange Board of India through Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160, issued on 28 December 2018, directly in response to the valuation and fairness challenges exposed by the IL&FS default of September 2018 . Side-pocketing had been debated in the Indian mutual fund industry for several years before the Association of Mutual Funds in India recommended its adoption in the wake of the IL&FS crisis.