Investors can stay up-to-date about the status of segregated portfolios as fund houses have to comply with certain disclosure requirements as per the law.
08-Sep-2021 •Shruti Agarwal
From the previous two parts of this article series, we know that bonds worth about Rs 6,000 crore have been segregated from open-end schemes in the last two and a half years. While some recovery has been made from these side-pocketed portfolios so far, nearly half of them look dead. Here is how you can find the relevant updates regarding segregated portfolios and how AMCs can improve their reporting in investors' interest.
Access to ongoing updates
Our analysis is based on a piecemeal scanning of the disclosure available on AMCs' website, as well as bond information on NSDL. There is no place where one can find this kind of combined data. As per the SEBI circular, fund houses have to comply with certain disclosure requirements, such as the information about the number of segregated portfolios should prominently appear under the name of the scheme at all relevant places, such as scheme information document (SID), key information memorandum (KIM) cum application form, advertisement, the websites of the AMC and AMFI, etc. Moreover, adequate disclosure of the segregated portfolio should be given in the SID, fortnightly/monthly/half-yearly portfolio disclosure and in the annual reports of the AMC and the scheme. Investors can also get an update on the recovery or a write-off of investments in the segregated portfolio in the press release provided by the fund house on its website.
However, we have found that disclosure across fund houses is non-standardised and inadequate. Although the introduction of the side-pocketing provision is a great step taken by the regulator, it needs to go a step further and make standards for segregated portfolios' disclosure in order to make it more comprehensive and meaningful to investors. Here are some issues that we found during our research. Also, we suggest the ways that can help resolve these issues.
First of all, the fact that a scheme has a segregated portfolio(s) should be disclosed right under the name of that particular scheme in all fortnightly/monthly/half-yearly portfolio disclosure. While many AMCs are already doing that, some remain silent on the segregation part and an investor comes to know about it only if s/he checks the table given below the main portfolio. Then, in line with the format of the main portfolio, fund houses disclose the market value of the segregated bonds. However, market value does not make much sense when the credit rating is downgraded to C or D. Thus, AMCs should be asked to disclose the total amount due as well. Besides, once a downgraded security surpasses its maturity, it forms a part of net current assets where the quantity held is not disclosed.
Barring one or two AMCs, most of them do not mention anything about the recovery proceeds in the portfolio disclosure. Also, in the case of a partial recovery, fund houses communicate only the total recovery to the AMC in their press releases. There is no scheme-level disclosure of the amount recovered. This further creates a black box. Moreover, fund houses should be mandated to give a periodic update on recovery proceedings and not just when there is any recovery or write-off taking place. During our research, we found only the Nippon fund house gave quite a comprehensive update on this front. We believe that AMCs should also be mandated to disclose, as part of their fact sheets of the main fund and their annual report, the number of side pockets created in the last three to five years, along with dates, their values, the amount of money recovered and paid to investors and the amount permanently written off. Ultimately, inadequate disclosure paves the way for a fund house to bury its past or poor management practices. This information is essential not only for existing investors but also for prospective ones.
It is true that few debt funds have inflicted losses to investors in the past, but there are certain things which you can do to avoid such a fate with your investments. We will talk about them in the next and the final piece of this side-pocketing article series.
You can read the next part here