UTI Mutual Fund makes provision for side-pocketing in 3 schemes

Our Bureau Mumbai | Updated on August 27, 2020

Arbitrage Fund, Multi Asset Fund and Equity Savings Fund give exit option

UTI Mutual Fund has made enabling provision for side pocketing in three of its schemes – Arbitrage Fund, Multi Asset Fund and Equity Savings Fund – by filing additional scheme information document with SEBI.

The provision will come into force from September 25 and investors who do not agree with the provisions have the option to exit the schemes without incurring any exit load till then. According to SEBI norms, mutual funds are allowed to create a segregated portfolio of distressed and illiquid assets in case of a credit event such as downgrade of debt to below investment grade or a default, with prior approval from the board of trustees. Mutual funds are also allowed to segregate unrated debt and money market instruments from their schemes in case of default by such papers.

The defaulted debt instruments are spun of into separate portfolio and investors are issued units in the segregated portfolio proportionate to units held in the main portfolio. As and when the mutual fund realises money from the defaulted debt instruments, proceeds are distributed among investors.

The board of UTI Mutual Fund has allowed the fund house to enable provisions to "side—pocket" illiquid assets from the portfolios of three funds with effect from September 25.

According to SEBI regulation, a mandatory 30-day period has to made available for investors to exit the schemes without paying any exit load.

The recent Covid pandemic and subsequent moratorium on loan repayment announced by RBI has unsettled the debt market and put mutual funds investments at risk.

Corporate debt instruments, in particular, have been under stress since the IL&FS default in September 2018 and it was followed by series of default by large corporates. Some of the debt schemes are also in trouble due to the conflict between the investment objective and portfolio positioning.

Published on August 27, 2020

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