Separation of MF units maintains liquidity for investors
JP Morgan mutual fund recently announced split of units. This does help investors protect liquidity of units at fair price that houses standard assets.
The mutual fund industry now has a new concept that is sought to be introduced called the side pocket concept where in the portfolio of the scheme is separated into two parts each of which represents an exposure to specific assets. This kind of act is usually done when there is a problem with a part of the portfolio and the idea is that the entire portfolio should not suffer due to some issues with a part of the holdings. J P Morgan has proposed this for its funds that have run into liquidity issues following a downgrade of Amtek Auto. Here is a closer look at the entire concept and what it means for the investor.
Split of units
The overall process that is followed in case of the side pocket concept is that there are units in a mutual fund scheme that are held by investors. These units are split up into two holdings wherein the two different units will now represent specific holdings out of the portfolio. In simple words the existing portfolio of the fund that is represented by the initial units is now split up into two parts and different units are allotted to the investor so that they represent the respective parts of the portfolio. This can happen due to various reasons but the most important one is to ensure that the overall portfolio does not get impacted especially on the liquidity front just because a small part of the overall holdings are not doing well or there is some problem with them.
Impact
When the investor experiences this side pocket concept then there will be several changes that they will face in terms of their holdings and investments. The first thing that will happen is that the units that they hold for the fund will now get split into two holdings so there will now be additional holdings that are present. The understanding of the investor should involve knowing which of the units represent what underlying holdings. The other thing that will be witnessed is that since the assets of the fund are split between the various holdings the net asset value of the fund will also be reduced and transferred to the other units so that there will be a correction on this front too. Investors should not be shocked at the reason and the manner for the fall in the net asset value of the main investment.
Liquidity
The real benefit to the investor comes in the form of liquidity that they will get when this kind of split is done. Usually this is done when a part of the portfolio runs into trouble so the idea is to separate the bad investment from the good and give separate units for the two investments. As was seen recently in the J P Morgan Mutual Fund case the fund had to put a restriction on the redemption from the fund even though a small part of this was affected due to the downgrading of the rating of Amtek Auto. When the separation takes place then the good investments will continue to have the regular form of liquidity that is seen with a normal mutual fund and hence this part which is usually a large part of the total holdings does not suffer. On the other hand the units representing the portfolio that is in trouble could find that liquidity is cut off and only when the investment is redeemed or sold and some amount recovered on this that the investor will be able to get the funds on the units.
JP Morgan mutual fund recently announced split of units. This does help investors protect liquidity of units at fair price that houses standard assets.
The mutual fund industry now has a new concept that is sought to be introduced called the side pocket concept where in the portfolio of the scheme is separated into two parts each of which represents an exposure to specific assets. This kind of act is usually done when there is a problem with a part of the portfolio and the idea is that the entire portfolio should not suffer due to some issues with a part of the holdings. J P Morgan has proposed this for its funds that have run into liquidity issues following a downgrade of Amtek Auto. Here is a closer look at the entire concept and what it means for the investor.
Split of units
The overall process that is followed in case of the side pocket concept is that there are units in a mutual fund scheme that are held by investors. These units are split up into two holdings wherein the two different units will now represent specific holdings out of the portfolio. In simple words the existing portfolio of the fund that is represented by the initial units is now split up into two parts and different units are allotted to the investor so that they represent the respective parts of the portfolio. This can happen due to various reasons but the most important one is to ensure that the overall portfolio does not get impacted especially on the liquidity front just because a small part of the overall holdings are not doing well or there is some problem with them.
Impact
When the investor experiences this side pocket concept then there will be several changes that they will face in terms of their holdings and investments. The first thing that will happen is that the units that they hold for the fund will now get split into two holdings so there will now be additional holdings that are present. The understanding of the investor should involve knowing which of the units represent what underlying holdings. The other thing that will be witnessed is that since the assets of the fund are split between the various holdings the net asset value of the fund will also be reduced and transferred to the other units so that there will be a correction on this front too. Investors should not be shocked at the reason and the manner for the fall in the net asset value of the main investment.
Liquidity
The real benefit to the investor comes in the form of liquidity that they will get when this kind of split is done. Usually this is done when a part of the portfolio runs into trouble so the idea is to separate the bad investment from the good and give separate units for the two investments. As was seen recently in the J P Morgan Mutual Fund case the fund had to put a restriction on the redemption from the fund even though a small part of this was affected due to the downgrading of the rating of Amtek Auto. When the separation takes place then the good investments will continue to have the regular form of liquidity that is seen with a normal mutual fund and hence this part which is usually a large part of the total holdings does not suffer. On the other hand the units representing the portfolio that is in trouble could find that liquidity is cut off and only when the investment is redeemed or sold and some amount recovered on this that the investor will be able to get the funds on the units.
Happy Investing
Source:Moneycontrol.com
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