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UTI Mutual Fund has side-pocketed its exposure to Zee Learn, an Essel Group company, following its rating downgrade by CARE Ratings on Tuesday, from AA (CE) to B.

Side-pocketing is the separation of a fund's portfolio in lieu of bad debt. It allows investors to exit the fund without giving up their ability to benefit from the recovery. Mutual funds are permitted to implement this procedure if a debt paper is downgraded below BBB (investment grade).

Zee Learn’s downgrade was on account of its failure to fund the debt service reserve account (DSRA), an account used to make up for any shortfall in principal or interest payment. Zee Learn was to fund the account at least 30 days before due dates on payments.

In addition, Zee Entertainment Enterprises Ltd was obligated to fund the DSRA, at least seven days before the repayment in the event of failure by Zee Learn to do so. That too didn't happen, CARE Ratings said.

The due date on the concerned debt of 44 crore is Wednesday. It was unclear, at the time of writing this copy, whether or not the payments on debt have been made.

UTI Medium Term Fund and UTI Credit Risk Fund have exposures of 3.02% and 9.24%, respectively, to Zee Learn. The two funds have assets under management (AUMs) of 118 crore and 466 crore, respectively, and are relatively small in their respective categories.

“Investors should evaluate the rest of the portfolios of the UTI schemes and factor in issues like exit load and tax before exiting. The Zee Group has been troubled for a while, so don’t generalize from this. However, in today’s environment, One should have allocation to government and PSU debt as well apart from private sector debt to reduce portfolio risk," said Amol Joshi, founder, Plan Rupee Investment.

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