Top tip: Mutual fund investor? Losing money? Stop it right now! Don't do this

Much to investors' frustration and worry, sometimes their investments, especially in debt mutual funds, get caught in bad asset performance funds. In such a case, an investor should not lose heart. In fact, it has been found that investors make the worst decision and decide to exit from their investment before time. They must not do that! This will cause money loss. Yes! That means taking their money back is the worst option to chose for investors. They should remain invested as their losses are being looked after by concerned authorities. 

The Securities and Exchange Board of India or SEBI provides an option to mutual fund houses where they can segregate portfolios to isolate the distressed debt portion into a separate fund with a separate NAV. This SEBI option is called side pocketing in debt funds. Through side pocketing option, mutual fund house's original scheme is segregated into two parts — good performing assets and distressed assets. On the basis of the empirical percentage of the distressed asset of the original scheme, separate NAV will be allocated to the mutual fund investor. This will allow investors to make money rather than lose it by exiting prematurely. An investment gives the best profit if it is for long term and the investor should remain invested in his fund for at least 5 years.

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Speaking on what does it mean when we say side pocketing in debt funds, Arun Kumar, Head of Research at FundsIndia.com said, "Side pocketing is an option provided by SEBI, where the fund houses can segregate portfolios to isolate the distressed debt portion into a separate fund with a separate NAV. This can be done when there is a downgrade in the paper below investment grade or when there is a default. Investors can exit the remaining unaffected part of the debt scheme anytime and still benefit from any future recovery in the stressed company. The redemption is capped for the segregated distressed portfolio till the recovery." 

On how does it work, Arun Kumar said that the original scheme is split into two schemes. The papers that are illiquid or in the default category are separated from all the other instruments in the original scheme and moved to the second scheme. Thus we end up having two schemes — one that contains the illiquid default papers and the other holding the good ones.

Highlighting the benefits of side pocketing option for a debt mutual fund investor, Jitendra Solanki, a SEBI registered tax and investment expert said, "After side pocketing, a mutual fund investor will have to monitor two NAVs — NAV for the original scheme and NAV after side pocketing of the distressed asset." Solanki said that side pocketing in debt mutual funds helps an investor to pay the price for only those assets that are not performing. This SEBI option helps an investor to gain from the performing assets, which might get pared by the non-performing distressed asset in the absence of side pocketing.

"Debt fund's side pocketing prevents distressed assets from adversely affecting the returns of the rest of the portfolio. The side pocket provides the required liquidity to the investor and ensures that their entire money is not stuck. Further, it also ensures that the early sellers in the fund do not benefit at the cost of the remaining investors (they may get stuck with a higher concentration of bad debt)," said Arun Kumar.