Two More Mutual Funds Side-Pocket Exposures To Yes Bank Bonds

Two more mutual fund houses, Franklin Templeton Mutual Fund and Baroda Mutual Fund, have decided to side-pocket their exposures to Yes Bank bonds following the downgrade of its debt instruments.

They join UTI Mutual Fund, Nippon India Mutual Fund and PGIM India Mutual Fund in “side-pocketing" or segregating their exposures to Yes Bank bonds. The move is aimed at preventing the distressed assets from damaging returns generated from more liquid and better-performing assets.

The development comes after the downgrade of debt instruments of Yes Bank to ''D'', which is below investment grade, by rating agency Icra. Yes Bank on Thursday was put under a moratorium, with the RBI capping deposit withdrawals at Rs 50,000 per account for a month and superseding its board.

In a statement, Franklin Templeton MF, which had an exposure of Rs 294 crore to Yes Bank debt, has created segregated portfolios in four of its schemes. The four schemes are Franklin India Debt Hybrid Fund, Franklin India Dynamic Accrual Fund, Franklin India ShortTerm Income Plan and Franklin India Credit Risk Fund.

Baroda Mutual Fund said it has proposed to side-pocket its exposure to Yes Bank with respect to two schemes—Baroda Treasury Advantage Fund and Baroda Credit Risk Fund—with effect from Friday. The move is subject to approval from the board of directors of Baroda Trustee India Pvt. Ltd.

As of January, mutual funds had exposure of over Rs 2,800 crore to Yes Bank bonds.

In December 2018, Securities and Exchange Board of India had permitted mutual funds to side-pocket their exposure to debt and money market instruments.

In case of a credit event that is a credit downgrade, like below investment grade and similar, segregated portfolio may be created.

Creation of segregated portfolios is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio.