Reliance Nippon Life Asset Management Company announced the amendment of its scheme information documents (SIDs) in a host of its debt and hybrid funds. The schemes in which a side pocketing provision has been introduced are 17 in number including Reliance Ultra Short Duration Fund, Reliance Strategic Debt Fund, Reliance Short Term Fund, Reliance Prime Debt Fund, Reliance Money Market Fund, Reliance Low Duration Fund, Reliance Liquid Fund, Reliance Income Fund, Reliance Hybrid Bond Fund, Reliance Floating Rate Fund, Reliance Equity Hybrid Fund, Reliance Equity Savings Fund, Reliance Dynamic Bond Fund, Reliance Credit Risk Fund, Reliance Banking and PSU Debt Fund, Reliance Balanced Advantage Fund and Reliance Arbitrage Fund. Investors have been given an exit-load free window of 1 month to exit the schemes in question which will end on 24th September 2019. This exit period has to be given because the introduction of a side pocketing provision constitutes a change of fundamental attributes of a mutual fund scheme.
Side pocketing is the creation of segregated portfolios in lieu of bad debt when there is a downgrade in paper held by a scheme below investment grade or when there is a default. A side pocket allows an investor to exit the remaining untainted part of the debt scheme at will and still benefit from any recovery in the bad debt later. This is not possible if the AMC merely writes off the debt. It is an option given to mutual fund houses by the Securities and Exchange Board of India (SEBI). Fund houses at present, are not mandated to use this procedure if a credit event occurs. Furthermore, investors should note that the current action of the fund house is merely an enabling provision. It does not necessarily mean that Reliance Mutual Fund will go ahead and implement side pocketing in the concerned scheme. Finally, side pocketing has to be done on the day of the credit event and hence it cannot be used to retrospectively for past downgrades/defaults. Certain debt schemes of Reliance Mutual Fund were exposed to debt issued by Reliance Home Finance and Reliance Commercial Finance which were downgraded to default in April-May 2019 and the paper in question was written down.
Investors should not unduly panic in response to this move by Reliance Mutual Fund. They should carefully look through the holdings of the Reliance Mutual Fund schemes in which they have invested to assess if there is a real danger of further defaults or they should ask their financial advisor to provide them with this assessment. They should also be mindful of the fact that although the exit load is waived for a period of 30 days, they will still have to pay capital gains tax on any gains they make. This is as per their slab rate for holding periods of less than 3 years and 20% with indexation for longer holding periods.