InvestorQ : Is there something known as side-pocketing in debt mutual funds? What is it?
Dhwani Mehta made post

Is there something known as side-pocketing in debt mutual funds? What is it?

Crowny Pinto answered.
3 years ago
Debt mutual funds are not without risk. When a default or rating of an underlying security downgrade, NAV of the fund get affected. Not just this, there is an additional problem related to it. There are cases, where some knowledgeable investors make benefit at the expense of less aware investors. 

Knowledgeable investors here mean those with access to better information than the other investors. It is not a crime to have better access to any information. However, some people may acquire information unfairly. For instance, institutions or companies or influential investors through their banking relationships get information which is not easily available to other investors. Smarter investors use this information for better fund management to get the true picture and act accordingly.
Retail investor, on the other hand, may lack the skills or influence to get such information or even don’t really act on such information.

Now, to address this issue SEBI has issued a circular in this regard, to segregate funds into two different parts – Main Portfolio (Good fund), this will have good securities or those assets unaffected by the event. The Segregated portfolio (the bad fund) will have the affected assets. You can also call this process side-pocketing, though SEBI has not specified nomenclature for this process. Under this process, losses will be equally absorbed by all funds.