Yes Bank: How it impacts your debt fund investments

Segregated portfolios

Mutual fund houses also have the option to carve out the bond exposure to Yes Bank. The financial market regulator – Securities Exchange Board of India has allowed the fund houses to create segregated portfolios if the rating of a bond falls below the investment grade – BBB. As of now, there is no communication from  rating agencies pertaining to the credit rating of  Yes Bank, which currently stands at BBB. No AMC so far has segregated the portfolio. Nippon India AMC's spokesperson said, "While Yes Bank exposure has been marked down to zero, no segregation has been done. Segregation or side-pocketing is allowed only if SEBI-defined triggers take place."

If the credit rating is downgraded and  fund houses choose to create segregated portfolios, then investors will be the allotted the same number of units of the segregated portfolios as they hold in base scheme. Both the units will have net asset values and the investors can transact in the units of base scheme. Though segregated portfolios are listed on the stock exchange, they seldom trade. Investors cannot sell them back to the AMC. Investors of the segregated portfolios are paid when the AMC recovers its dues from the issuer.

What should investors do?

There is little that you can do with your existing investments in the schemes holding Yes Bank bonds, as the damage has already taken place. Ashish Shanker, head – investment advisory, Motilal Oswal Private Wealth Management expects fund houses to announce side pockets (segregated portfolios) in the affected schemes. "As more clarity emerges on the resolution plan of Yes Bank, investors will get more clarity about the future of their troubled investments. For the time being, investors should hold on to their investments. After the segregated portfolios are created, investors can exit the units allotted in base scheme," Shanker adds.

Deepak Chhabria, founder and managing director of Axiom Financial Services says, “The writing was on the wall for a long time when it comes to Yes Bank. Despite that the funds are seen holding on to its bonds. Mutual funds scored low on risk management in this case. Liquidity of these bonds has been low in the secondary market and the same needed to be factored in by the fund managers at the time of investments."

As the economy is slowing down and there is a lot of uncertainty in the global markets after the Corona Virus epidemic, mutual fund investors need to exercise caution. Chhabria advises steering clear of all credit-risk funds. He recommends investments in liquid , overnight and banking & PSU bond funds that invest in short-term papers, till the dust settles.

For fresh investments in bond funds, Shanker recommends sticking to high credit quality options such as banking and PSU and corporate bond funds, given the elevated risks in the financial markets.

If your MF account is linked to Yes Bank, change to a different bank while redeeming units.  You can update details of a new bank account online by submitting a copy of a cheque. You also have the option of updating your new bank account details offline by filling a form.