India's oldest AMC – Unit Trust of India (UTI) – has decided to segregate portfolios in respect of debt securities of Zee Learn Limited in UTI Credit Risk Fund and UTI Medium Term Fund.
Investors putting their hard-earned money in debt-oriented mutual fund (MF) schemes, which are perceived as much safer than equity-oriented funds and have won the trust of investors over the years, continue to suffer due to a series of bond failures starting with the IL&FS fiasco in September 2019.
With every bond failure, Asset Management Companies (AMCs) – after failing miserably to predict the financial health of companies that were on the verge of default and failing to take corrective measures to safeguard investors’ money – end up taking measures like portfolio segregation, side pocketing etc to prevent full loss for investors, but partially block the money on redemption.
After Franklin Templeton took an extreme step in July this year to completely freeze as many as six of its debt funds, India’s oldest AMC – Unit Trust of India (UTI) – has decided to segregate portfolios in respect of debt securities of Zee Learn Limited in UTI Credit Risk Fund and UTI Medium Term Fund.
After the segregation, existing investors in the two schemes shall be allotted an equal number of units in the segregated portfolio as those held in the main portfolio and no subscription or redemption will be allowed in the segregated portfolios.
Separate NAVs of the segregated and main portfolios will be disclosed from the date of creation of the segregated portfolio.
New investors investing in the two schemes will be allotted units only in the main portfolio based on its net asset value (NAV) and the existing investors may fully redeem the units in main portfolios only.
Investors redeeming their units will get redemption proceeds based on the NAV of the main portfolio and will continue to hold units of the segregated portfolio, the money in which will be distributed to investors in proportion to their holdings in the segregated portfolio only upon recovery of money from Zee Learn Limited.
Due to their risk-free track record over the years, debt funds have won the trust of the investors and people even put their short-term emergency funds due to good return and excellent liquidity features of such funds.
As a result, holding even some part of redemption money would put debt fund investors in great discomfort and difficulty, apart from hurting the trustworthiness of the debt MF segment.