Pricing of Units for Segregated Portfolio

Segregated Portfolio (Side Pocket):

• Purpose: A segregated portfolio (also known as a side pocket) is created to separate distressed or illiquid assets from the main portfolio of a mutual fund scheme. This is done to protect investors from the negative impact of these assets on the overall NAV.
• Trigger for Segregation: Segregation is typically triggered by a credit event or potential downgrade of credit rating of a specific debt instrument in the portfolio.
• Unit Pricing for Segregated Portfolio:
  • When a segregated portfolio is created, existing investors in the scheme are allotted units in both the main portfolio and the segregated portfolio, proportionate to their holdings.
  • NAV of Segregated Portfolio: The segregated portfolio has its own NAV, which is calculated separately based on the fair valuation of the distressed assets held within it.
  • Pricing of Segregated Portfolio Units: The units of the segregated portfolio are initially priced based on the estimated fair value of the distressed assets at the time of segregation.
  • Realization of Value: The value of segregated portfolio units depends on the recovery or resolution of the distressed assets. If the assets recover value, the NAV of the segregated portfolio units may increase, and investors may receive proceeds upon resolution. If the assets further deteriorate, the value could decline further, and investors might face losses.
  • Liquidity: Units of segregated portfolios are typically illiquid and may not be easily tradable until the underlying assets are resolved.