top of page

Redemption From A Segregated Mutual Fund Portfolio

  • Cambridge Wealth
  • Dec 30, 2024
  • 3 min read

Segregation, or "Side-Pocketing" involves separating out specific debt or money market investments that become highly risky owing to credit downgrades. This protects investors by isolating these potentially problematic holdings within the fund. This article looks into the concept of segregated portfolios and the process of redemption of your units from a mutual fund scheme classified as a segregated portfolio.


What is a Segregated Portfolio?

Segregation, also known as "side-pocketing," is a mechanism introduced by the Securities and Exchange Board of India (SEBI) in December 2018. It allows mutual funds to isolate specific debt or money market instruments that face credit challenges, such as downgrades, from the main portfolio. This protects the remaining, potentially healthy, investments in the fund from the potential risks associated with the troubled assets.

  • Segregated Portfolio: A portfolio comprising debt or money market instruments affected by a credit event, that has been segregated within a mutual fund scheme.

  • Main Portfolio: The scheme portfolio excluding the segregated portfolio.

  • Total Portfolio: The scheme portfolio including the securities affected by the credit event.

By segregating assets, the fund house creates a separate compartment for potentially risky holdings, allowing for more focused management and protecting the main portfolio's value.


Redemption From A Segregated Mutual Fund Portfolio

Unlike redeeming units from the main portfolio of a debt fund, redeeming units held within a segregated portfolio presents a unique set of circumstances. Here's what you need to understand:

  • Limited Redemption Options: SEBI regulations currently do not allow direct redemption of units from the segregated portfolio itself. This means you cannot choose to sell only your segregated portfolio holdings.

  • Redemption Through Main Portfolio: When you choose to redeem your entire holding in the fund (including units in both the main and segregated portfolios), you receive redemption proceeds based on the Net Asset Value (NAV) of the main portfolio only. The NAV of the segregated portfolio is not directly factored into your redemption amount.

  • Listing on Stock Exchanges: However, there's a silver lining. SEBI mandates that the segregated portfolio units be listed on recognised stock exchanges within ten working days of creation. This listing allows you to explore the possibility of selling your segregated portfolio units on the secondary market, subject to market liquidity.

 

An important point to note is that directly redeeming money from a segregated portfolio within a mutual fund scheme is generally not possible. Redemptions typically occur from the main portfolio of the scheme.


Here's a breakdown of how redemptions work in a segregated portfolio scenario:

  • Segregated Portfolio Units: These units represent your holding in the isolated asset(s) that triggered the segregation. You cannot directly redeem these units for cash.

  • Main Portfolio: Redemptions continue to function normally for the main portfolio. When you redeem units from the main portfolio after segregation, you receive proceeds based solely on the main portfolio's NAV (Net Asset Value).


Exit Strategies for Segregated Portfolio Investors

While direct redemption from the segregated portfolio isn't available, there are alternative ways to potentially access your investment:

  • Listing on Stock Exchange: As mentioned previously, the fund house might list the units of the segregated portfolio on a recognized stock exchange within 10 working days of its creation. This allows you to sell your units on the exchange to other investors, subject to market conditions and prevailing unit price.

  • Transfer of Units: If the segregated portfolio is listed on a stock exchange, you can potentially transfer your units to another investor willing to hold them.

Important Considerations:

  • Market Liquidity: The liquidity of the segregated portfolio units on the stock exchange can be unpredictable. There might not always be buyers readily available, potentially impacting the price you can fetch for your units.

  • Performance Uncertainty: The segregated portfolio holds assets that faced credit events, raising concerns about their potential for recovery. The price of your units will depend on the perceived future prospects of the underlying asset(s).

Overall, while direct redemption isn't an option, segregated portfolio units offer some possibility of eventual liquidity through a stock exchange listing or transfer. However, it's crucial to be aware of the potential challenges associated with market liquidity and uncertain performance.


Conclusion

Segregated portfolios offer a layer of protection for your investment in debt mutual funds. While redeeming units from a segregated portfolio presents unique challenges compared to the main portfolio, understanding the available options helps you make informed decisions.

Remember, consulting with a financial counsellor can be beneficial, especially when navigating complex situations like these.

Recent Posts

See All

Comments


Pune | Bangalore | Mumbai | London

+91 72193 68995 | +447707771878

AMFI Registered Mutual Fund Distributors

Date of Initial Registration: 22-10-2022

AMFI Registration Number: ARN 172841

Current Validity of ARN: 21-20-2026

About us

FAQs

Know more

What we do

Taxation

Investing

Insurance

Disclaimer : The information, data or analysis does not constitute investment advice or as an offer or solicitation of an offer to purchase or subscribe for any investment or a recommendation and is meant for your personal information only and suggests a proposition which does not guarantee any returns. Baker Street Fintech Pvt. Ltd. (hereinafter referred as BKL) or any of its affiliates is not soliciting any action based upon it. The historical performance presented in this document is not indicative of and should not be construed as being indicative of or otherwise used as a proxy for future or specific investments

The Funds Displayed on the Cambridge Wealth Website have been listed in all fairness, after considering and determining various factors, including, but not limited to, quantitative measures and qualitative assessments, and to the best of its ability, by Baker Street Fintech Pvt Ltd and all its members, employees and any relevant person associated with us. Any sort of graphical representations, recommendations, feedback and reviews, provided on the Website, are in no way, either a guarantee for the performance of the funds or an assessment of the fund’s, or the fund’s underlying securities’ creditworthiness. Mutual fund investments are subject to market risks. Please read all the scheme(s) related information and any other related documents before making an investment. Past performance of the relevant securities is not an indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.

Baker Street Fintech Pvt Ltd. (ARN: makes no warranties or representations, express or implied, on products offered through the platform. It accepts no liability for any damages or losses, however caused, in connection with the use of, or on the reliance of its product or related services. Terms and Conditions and other relevant policies of the website are/shall be applicable.

 

Exchange disclaimer

The Bombay Stock Exchange/National Stock Exchange of India Ltd is not in any manner answerable, responsible or liable to any person or persons for any acts of omission or commission, errors, mistakes and/or violation, actual or perceived, by us or our partners, agents, associates etc, of any of the Rules, Regulations, Bye-laws of the Bombay Stock Exchange, National Stock Exchange of India Ltd, SEBI Act or any other laws in force from time to time. The Bombay Stock Exchange/National Stock Exchange of India Ltd is not answerable, responsible or liable for any information on this Website or for any services rendered by us, our employees, and our servants. If you do not agree to any of the Terms & Conditions mentioned in this agreement, you should exit the site.

bottom of page