Rs 800 crore still stuck in multiple segregated mutual fund portfolios

Asset managers, who began the pandemic with multiple segregated portfolios, are fewer by nine thus far in 2021, even as greater regulatory clarity emerged on the handling of troubled schemes.

The Securities and Exchange Board of India (Sebi) said a simple majority of unitholders must consent to the wind-up of such schemes.  Mutual funds winding up because of the Covid-19 pandemic had contributed to a rise in the creation of segregated portfolios. The numbers have been gradually coming down since early 2020.

The total number of segregated portfolios in January was 35, reveals the data from the Association of Mutual Funds in India. This was down to 26 as of end-November. The total assets under the segregated portfolios are also down 5.2 per cent to Rs 814 crore.

A segregated portfolio is created to deal with a drop in the value of a debt security in which the mutual fund scheme has invested in. It is used to separate the affected security within the portfolio. Investors are returned their money as and when recovery takes place.

“All existing investors in the scheme as on the day of the credit event shall be allotted an equal number of units in the segregated portfolio as held in the main portfolio. Investors redeeming their units will get redemption proceeds based on the main portfolio and will continue to hold the units of the segregated portfolio. Investors subscribing to the scheme will be allotted units only in the main portfolio...,” stated the December 2018 Sebi circular on the matter.

The steps are taken to ensure fair treatment to all investors affected by the security.

The largest number of segregated portfolios was in credit risk funds. There were 10 of them as of January. This dropped to eight as of November.

The ultra short duration fund category had zero segregated portfolios in November, compared to the one in January.

Other segments which have seen a drop in segregated portfolios include low duration, short duration, medium duration, and dynamic bond funds.

A number of them belonged to Franklin Templeton Asset Management (India) schemes. A number of funds faced issues amid tighter liquidity because of the pandemic. They announced the winding-up of six schemes. These schemes had 14 segregated portfolios between them.  The schemes involved (and a corresponding number of segregated portfolios) were the Franklin India Ultra Short Bond Fund (1), Franklin India Low Duration Fund (2), Franklin India Short Term Income (3), Franklin India Income Opportunities Fund (2), Franklin India Credit Risk Fund (3), and the Franklin India Dynamic Accrual Fund (3).

“From April 24, 2020, to December 15, 2021, the six schemes under wind-up have received Rs 30,876 crore from maturities, prepayments, sale, and coupons. Cash of Rs 26,098 crore had been distributed in eight tranches to unitholders (except cases requiring remediation or with incomplete documentation) in all six schemes,” said a December 15 update from the asset manager.

“The schemes are under winding-up and SBI Funds Management has been appointed as the liquidator, according to the order of the Supreme Court dated February 12,” it added.

Other asset managers in the space have also been affected. The overall assets under management for the industry’s segregated portfolios has come down. It was Rs 858.7 crore as of January. It has fallen to Rs 814 crore in November.