How Sebi is making debt funds safer for investors after IL&FS collapse

One fear among regulators is that allowing side pocketing could lead to fund managers taking higher risks. Even in the US, side pocketing is not allowed in mutual funds, only in hedge funds

When IL&FS bonds defaulted in September, the net asset values (NAV) of a number of liquid funds dropped by 5-6 per cent within a day. To make debt funds more robust, the Securities and Exchange Board of India (Sebi) is considering some proposals. 

One such proposal is side-pocketing. Here, a separate fund is created and the distressed bonds are placed in it. Investors are issued units of the secondary fund also, but they cannot sell them for a while. “Side-pocketing is a good option because it helps to keep liquidity intact in the main portfolio, which remains healthy,” says Dwijendra Srivastava,