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SEBI is considering a proposal of side pocketing toxic assets in the mutual fund portfolio. A side pocket allows fund managers to move a toxic asset from good assets. It allows the fund to set aside assets and split the NAV into two parts. The fund will now issue separate units in pro rata basis. Side pocketing toxic assets ensures that the investors invested in the fund during this write off only will receive the benefit if the toxic assets recover in the future.

Side Pocketing is an Investor-Friendly Move

Currently, two fund houses in India recently used side pocketing of toxic assets. Experts say that it is an investor-friendly move. This is because it sets aside the illiquid asset and reduces the spilling effect on the fund due to few assets. In the case of redemption, not the entire amount of investors is locked. Only a certain portion of the money is locked. Investors are free to redeem the portion of assets that are free. For the rest of their money to be redeemed they have to wait until the assets recover. Side pocketing will help retail investors as they are very slow in absorbing and reacting to any news. In case they want to redeem they will not be getting the full value to it. So this move will benefit the retail investors and protect them against major market players.

Regulator Intervention is Important

Although it is followed globally experts say that AMC shouldn’t use this as a routine option for assuming high risk in the portfolio for better returns. They believe that it should only be allowed in India as a measure of extreme conditions like sharp downgrades in the rating of securities. The only objection to side pocketing is the expense that goes behind evaluating the illiquid assets. With expense ratios falling, there is a fear that the AMC can be reckless while dealing with it. The regulators can step in and make the disclosures of the illiquid assets mandatory.