On 27th August’2015, rating agency (Brickwork) downgraded the rating to BWR C (from BWR A+) and schemes took a hit of 3.38% (JPMorgan India Short Term Income Fund) & 1.73% (JPMorgan India Treasury Fund) in just one day. In the general interest of all the unitholders of affected schemes (Treasury Fund and Short-Term Income Fund), effective 28th August’2015, the trustees decided to limit the redemptions in the two schemes to a percentage limit not exceeding 1% of the total number of units outstanding on any business day. Fund was carrying these bonds in the segregated portfolio at approx. Benchmarks . The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official stand of Kuvera. Simply put, it allows an open-ended scheme to quarantine a bad asset in a side cart portfolio allowing fair treatment to all unitholders and deal with liquidity risk. Let’s us understand with the help of a hypothetical scheme with the following details: Let us now consider that “Security 9” has been downgraded to below investment grade by rating agencies on 02nd Jan’20XX and fund house decided to mark it down by 50% (this number is decided by credit rating agencies, although valuation committee of the fund house may take more conservative stance) and segregate this from rest of the portfolio. Therefore, segregated portfolio of unrated debt or money market instruments may be created only in case of actual default (of interest or principal or both). However, although growing in popularity SPCs still remain something of a niche product. There may not be active trading of units in the stock market. The regulator rejected the proposal that the creation of a segregated portfolio could lead to some fund managers taking unnecessary risks. But in case the trustee declines the segregation, there will be no segregation and units will be created based on the total portfolio and total portfolio… Nishant is passionate about mutual funds and personal finance and can be reached at twitter handle @stepbystep888. Fees are payable to the Registrar of Companies in the Cayman Islands (Registrar) on incorporation of an SPC and annually, including fees for each additional segregated portfolio established. The concept of an SPC is that the relevant company, which remains a single legal entity, may create separate segregated portfolios (each, a Portfolio) with the assets and liabilities of each Portfolio being … separately identified and include the words “Segregated Portfolio” in such identification. An application for a receivership order in respect of a segregated portfolio … They are mostly commonly used in the formation of collective investment schemes as umbrella funds and for the formation of captive insurance companies (typically a variation of a "rent-a-captive"). There is no capping on a number of segregated portfolios in a scheme, if the need arises, a fund house can do as many segregations as required (subject to fulfilment of trigger conditions and approval from trustee within 1 working day of credit event). segregated portfolio and the distribution of assets attributable to such segregated portfolio to those entitled to have recourse thereto (section 224(1)). But in case the trustee declines the segregation, there will be no segregation and units will be created based on the total portfolio and total portfolio’s NAV. So far, SEBI has come out with two circulars on the creation and segregation of mutual funds. 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