Making sense of side-pocketing

Jai and Veeru were having some lemon tea and plum cake at the neighbourhood bakery to celebrate the Christmas eve. Jai: I am so happy that we have just a week remaining in this year, Veeru. 2018 has been so horrible for my work and investments. Veeru: I completely agree. Usually, if the stock market is behaving crazily, I like to park my Diwali bonus in debt funds. But recently, going from equity to debt has been like jumping from the kadai into the tandoor. With AAA-rated companies defaulting and NBFCs going through the Lehman moment, it was a tough time! Jai: Yeah, but look at the positive side. It is because of this panic that we may get 8 or 8.5 per cent on debt funds, when inflation is 2.3 per cent. You're pocketing a 5 per cent real return. What a Christmas gift! Veeru: You mention 'pockets' and here's our friend Gabbar looking like Santa Claus. Gabbar, what've you got for us? Your pockets seem to be full. Gabbar: The kids asked for sweets from Mangatram. But good that you reminded me of my pockets. You see, after you two asked me to redeem small-cap funds, I put the money in debt funds. But some of them lost money in the IL&FS crisis and SEBI has now allowed something called 'side pockets'. They will take my money, invest in bad bonds and then put the bad bonds into their side pocket. Isn't it? Criminal that SEBI is allowing this! Jai: Gabbar, side-pocketing for mutual funds is not like hiding your Diwali bonus in your pant pocket to save it from Bhabhiji! Veeru: Ha ha, don't get so agitated, Gabbar; side-pocketing is a good thing. Gabbar: How come? I have never heard of 'good' side pockets. Veeru: Think of debt funds as the vegetable basket in your kitchen. Suppose you have a few potatoes, tomatoes, onions and a pumpkin in it. But the tomatoes are old and you suddenly find some are rotting

This article was originally published on February 12, 2019.