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Segregation of bad assets by Mutual Funds
Why is it in the news?
- The Securities and Exchange Board of India (SEBI) allowed mutual funds to create segregated portfolios or ‘side-pocket’ facility based on credit events with respect to debt and money market instruments.
- The Move is taken to minimise an industry-wide impact of a debt default.
- SEBI will also come out with a consultation paper on uniform valuation methodology for pricing of corporate bonds.
More about the news
- Creation of segregated portfolio is a mechanism to separate distressed, illiquid assets from other more liquid assets in a mutual fund portfolio to deal with a situation arising due to a credit event.
- With a segregated portfolio, investors who may take the hit when the credit event happens shall get the upside of future recovery, if any.
- SEBI’s decisions are largely triggered by the developments at IL&FS, which has defaulted on its various repayment obligations.
- IL&FS crunch led to a liquidity crisis across segments like mutual funds and non-banking financial companies.
What are the Mutual Funds?
- A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets.
- Mutual funds are operated by professional money managers, who allocate the fund's investments and attempt to produce capital gains and/or income for the fund's investors.
- A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Source
The Hindu.