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Is segregation of portfolios applicable to equity funds?

Dhirendra Kumar explains why segregation of portfolios or side-pocketing in case of defaults on bonds can apply to equity funds too

I thought that a segregated portfolio was applicable only in the case of debt/hybrid funds where AMC perceived defaults by companies on bonds/NCDs held by them. I recently got a letter from an AMC (where I am holding only equity funds) where they asked me to opt for redemption in case I don't agree to segregation. Is this applicable to me since I have only equity funds?
- Bhanumati Suresh

Yes, it can well be applicable to equity funds, as typically these funds have very small allocations to fixed-income instruments. So, if the fixed-income component or the bond investments in an equity fund are facing a crisis, then there could be a need for segregation. It is actually a very useful thing if you look at it this way - in case the repayment of the principal or interest from a bond gets difficult, then at least your interest remains guarded that whenever the issue gets resolved, you will be entitled to the recovery.

Typically, in equity or equity-oriented funds, a segregated portfolio should not be there and generally, it won't. But it can happen as many hybrid funds have significant bond allocations and many equity funds have about 5-10 per cent in fixed income.

With regard to the particular notice that you have got, it primarily may be a situation that the fund had a prospectus but segregation provision was not enabled and now the AMC is enabling the provision to actually position the fund for such a situation in future. Having said that, this doesn't mean that segregation is going to happen in the case of your equity fund. Further, I really don't visualise that an equity fund will face a situation with their fixed-income investment that will translate into the segregation of a portfolio or what is popularly called as side pocketing.

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