On Wednesday, SEBI tweaked the provisions pertaining to the segregation of portfolios in view of the ongoing pandemic. The capital market regulator allowed mutual fund companies to segregate debt exposure to the securities of companies that have approached them for debt restructuring because of COVID-19 stress. Given this rule, securities that are above the investment-grade can also be segregated.
As per the circular released, the date of the proposal for debt restructuring received by AMCs would be the trigger date for the creation of side-pocket. These modifications would immediately come into effect and will remain effective until December 31, 2020.
In the aftermath of IL&FS, SEBI introduced the 'side-pocketing' provisions in December 2018 to protect investors' interest. The provision allows AMCs to separate troubled bonds (those downgraded to below-investment-grade) in a debt portfolio to prevent the good portion of the portfolio from getting impacted by the write-offs in the distressed bonds, thereby safeguarding the interests of those genuinely entitled to any recovery. Since the introduction of the provision, about 27 funds across seven AMCs have created side-pockets, segregating exposure to troubled bonds.
While such modifications are appreciated, investors should continue focusing on high-quality debt funds instead of getting lured into the promise of high returns. Given the low-interest-rate environment, fixed-income returns are going to be fairly modest as compared to those witnessed in the past. Thus, investors should keep their expectations in check.