Dhirendra Kumar sheds light on the benefits of side pocketing
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I'm a senior citizen and about two years ago, invested around Rs 10 lakh in Franklin India Ultra Short Bond Fund - Super Institutional Plan. The performance was pretty good until a month back or so when there was a sudden drop in its performance and NAV. Further, it has now fallen from its five-star position and becoming a three-star fund. Should I continue or exit from this fund? Also, I wanted to know that if I move from one debt fund to another, will this be considered as a new investment?
As you rightly mentioned, Franklin India Ultra Short Bond Fund - Super Institutional Plan has been a star performer, giving out around 8-9 per cent returns. About one-and-a-half months back, the fund took a hit on its NAV, owing to the bond of Vodafone Idea Ltd that was eventually downgraded to below the investment-grade level. Subsequently, a segregated portfolio was also created by the fund house. The provision of side pocketing of distressed assets was introduced by SEBI in December 2018. Owing to the provision, any recovery in the segregated security will be returned to you and none of the new investors will be able to benefit from it.
Further, while the risk of debt funds has been witnessed here, I feel for someone invested since three-four years will still be able to earn moderately better from this fund than deposits. Having said that, such an event was disappointing, but I hope that Vodafone Idea Ltd will see some resolution soon and the investors will get some bit of a recovery.
Regarding your second question, moving from one debt fund to another is considered as a redemption from the old fund and new investment in the new fund. So, you won't get the benefit of long-term capital gains.