Segregated Portfolio

Segregated portfolio, sounds tough? We have seen people often feel devastated once they hear a new term related to the stock market. But understanding a segregated portfolio is not that tough. No matter whether you are a fresher in the industry or have experience, you would definitely come across this term. Once you know the concept, you will definitely consider a segregated portfolio as the smartest concept that protects investors. 

To know deeply about segregated portfolios, you must be aware of what they are, why they matter, and how they actually work. Let’s understand them right below, 

What Is A Segregated Portfolio? 

A segregated portfolio simply refers to creating the different compartments you need for an investment fund with a single legal entity. Let’s understand, for example, 

Imagine you have one large basket for vegetables. Instead of keeping all the vegetables in one bucket you are creating some smaller compartments inside. One is for potatoes, one for carrots, one for onions and so on. Now one pack of vegetables got spoiled but as you maintain separate compartments for separate vegetables the other ones will be safe and untouched. 

That same thing a Seg Portfolio does in the financial market, it basically separates all the liabilities and assets so that any financial issues in one portfolio don’t spoil the other. 

Why Do You Need A Segregated Portfolio?

Once you know what a segregated portfolio is, the next question that comes to mind is Why should we get bothered? The reason is nothing but things can any time go wrong, especially in the share market. The market can crash anytime, assets can lose their value overnight, and companies can default on loans. When any fund pools assets together, one single asset can potentially consume your entire gain. Here are some points why a Seg Portfolio is important, 

1. It creates transparency for the investors as they can see which part of the fund holds which assets.
2. It provides fair treatment to the investor. Only the investor in the troubled portfolio has to tolerate the loss, not everybody. 
3. It lowers the risk of losing a huge amount. 

Segregated Portfolio In Mutual Fund

In India if you are investing in a mutual fund then a Seg Portfolio will play a significant role in your investment journey. Now let’s assume you are investing in a mutual fund that holds some bond from a company. At this point the company suddenly defaults. Without segregation, the NAV (Net Asset Value) of the mutual fund would take a big hit that will affect all the past, present and future investors. 

According to the rules of SEBI (Security & Exchange Board of India), now mutual fund houses can segregate the bed assets into a separate portfolio which is known as “side pocket”.

What happens in this pocket? 

1. All the troubled assets will move into a segregated portfolio. 
2. The main portfolio remains the same and works with the better-performing assets. 
3. Existing investors will get units in this new portfolio on the segregation date. 

What Does Segregated Portfolio Mean For Investors, Investing In Mutual Funds? 

When you decide to invest in a mutual fund, particularly in debt funds, you need to understand a Seg Portfolio, as it will help you a lot. 

1. It protects your returns. When you invest, your portfolio will never be unfairly impacted with the help of a segregated portfolio.
2. You will understand which part of your investment is risky and which part is safe, using a segregated portfolio. 
3. It helps in assessing funds management quality. Therefore you can understand that a segregated portfolio cares for your protection as an investor.

Some Upside & Downside Of Segregated Portfolio 

As an investor, before you start using a Seg Portfolio, you must be aware of the outside risks and downsides. Let’s have a quick look,

Upsides

1. It helps the fund manager minimize the risk.
2. Protects the investors from the effects of bad assets. 
3. Makes investment more transparent. 

Downside

1. Investors cannot expect a recovery of segregated assets. 
2. When the segregation is extreme, it might signal poor asset quality in the fund. 
3. For the average investor, it might be difficult to track. 

Please Note

Once you know everything about a segregated portfolio, we would prefer to give you some quick tips that you must keep in mind while investing. 

1. Always try to diversify your portfolio. 
2. If you are not sure about a segregated portfolio, always try to contact financial advisors. 
3. When you hear any news regarding a segregated portfolio, don’t panic; rather, start investigating. 

Also, check: What is eDIS?

Wrapping Up, 

Segregated portfolio is not a very usual thing and that’s why people do not understand the importance. But if things go wrong you will be glad to have this. A segregated portfolio is the ideal option to manage risk, maintain fairness and give you a smoother investment journey even in the tough times. So from the next time if someone uses the terms in front of you, you would be able to give a positive response. 

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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.