A segregated portfolio, or side pocket, separates a defaulted debt holding from the rest of a scheme, so existing investors share any recovery.
When a company whose bonds a debt fund holds defaults, or its rating falls below investment grade, the fund house may split that holding off into a segregated portfolio, often called a side pocket. SEBI has allowed this since December 2018.
On the day it is created:
The main portfolio stays open for purchases and redemptions. The segregated units cannot be redeemed with the fund house; they are listed on a stock exchange, though they rarely trade. If the company later pays some or all of what it owes, the money goes to the holders of the segregated units.
The purpose is fairness. Without a side pocket, investors who redeem early would leave the bad debt to those who stay, and new investors would buy into it.
The fund house cannot charge a management fee on the segregated portfolio. See credit risk.
Each fund page has its returns, risk, costs, managers and everything it holds.