Main portfolio
Also written Main portfolio of a scheme · Main scheme portfolio
SEBI's defined term for what is left of a mutual fund scheme once a segregated portfolio has been carved out of it — the scheme portfolio excluding the segregated portfolio.
In plain language
A debt scheme holds a bond. The issuer is downgraded. The AMC may lift that one bond out into a segregated portfolio.
What is left behind has a name of its own. SEBI calls it the main portfolio, and defines it by exclusion: the scheme portfolio excluding the segregated portfolio.
The name matters because the two halves are then treated as different animals.
The main portfolio carries on like a normal scheme. People can buy into it. People can sell out of it. Its NAV is struck every day.
The segregated portfolio cannot be bought or sold at all. It sits there until money comes back from the issuer.
So after a credit event one scheme has two NAVs. And a new investor only ever gets units of the main one.
How it works
Chapter 10 section 10.8.2 gives both definitions in the same breath. A segregated portfolio is a portfolio of debt or money market instruments affected by a credit event that has been segregated in a scheme. The main portfolio is the scheme portfolio excluding it.
What follows, once the trustees approve:
| Rule | Main portfolio | Segregated portfolio |
|---|---|---|
| NAV | declared daily from the day of the credit event | declared daily from the day of the credit event |
| Subscription | allowed, at the main portfolio NAV | not allowed |
| Redemption | allowed, at the main portfolio NAV | not allowed — listing is the only exit |
| Units on day one | unchanged | equal number to the units each investor held in the main portfolio on the day of the credit event |
| Listing | not applicable | on a recognised stock exchange within 10 working days of creation |
An investor who redeems takes the main portfolio NAV in cash and continues to hold the segregated units. An investor who subscribes afterwards is allotted units only in the main portfolio, at its NAV. If the trustees do not approve the proposal, there is no split at all and both subscription and redemption are processed on the NAV of the total portfolio.
There is also a cost wall, and it runs one way. No investment and advisory fee may be charged on the segregated portfolio. Other TER may be charged there pro-rata, only upon recovery, and it shall not exceed the simple average of those same expenses charged daily on the main portfolio during the period the segregated portfolio existed. Legal charges for recovery go to the segregated portfolio in proportion to the amount recovered, capped at the maximum TER limit applicable to the main portfolio, with any excess borne by the AMC. And the costs of the segregated portfolio shall in no case be charged to the main portfolio. Chapter 7 section 7.6 repeats the NAV and TER position for the same split.
A worked example
The workbook's own case, read from the main portfolio's side. On 30 September 2019 a debt scheme has net assets of Rs 1,00,01,227 across 10,000 units, a NAV of Rs 1000.1227. That day 8.00% XYZ Ltd is downgraded from A- to C, its NCD is marked down 50 per cent, and it is segregated.
| Net assets (Rs) | Units | NAV per unit (Rs) | |
|---|---|---|---|
| Main portfolio | 87,62,427 | 10,000 | 876.2427 |
| Segregated portfolio | 12,38,800 | 10,000 | 123.88 |
| Total | 1,00,01,227 | 1000.1227 |
Notice the arithmetic: the two NAVs add back to the pre-event NAV. Nothing has been lost by the split itself.
Now two investors. Mr Deshpande held 400 units before the event, so he now holds 400 of each. He redeems, and receives 400 × 876.2427 = Rs 3,50,497. He keeps his 400 segregated units, worth Rs 49,552 at the marked-down NAV, and can only sell them on the exchange.
Ms Fernandes invests Rs 1,00,000 the next day. She gets 1,00,000 ÷ 876.2427 = 114.124 units, all of them in the main portfolio. She has no exposure to the defaulted bond, and she paid nothing for it.
On costs: say the main portfolio's expenses excluding investment and advisory fees average 0.35 per cent a year while the segregated portfolio exists (illustrative). That average is the ceiling for what the segregated portfolio may be charged, and only when money is actually recovered. If the recovery lawyers cost more than the main portfolio's TER limit allows, the AMC pays the difference — the main portfolio does not.
Why NISM asks about it
Chapter 10 (Risk, Return and Performance of Funds), section 10.8.2, which defines both portfolios and works the illustration; and Chapter 7 section 7.6, which restates the NAV and TER rules for the split. Expect a definition question ("main portfolio means the scheme portfolio excluding ..."), a question on which portfolio a fresh subscriber's units come from, a question on what happens if the trustees refuse the proposal, and the cost question — which portfolio may never bear the other's expenses.
Common exam traps
- The main portfolio is defined by exclusion, not by quality. It is whatever is not segregated, which may still include other low-rated paper.
- A new subscriber gets main-portfolio units only, at the main portfolio NAV.
- A redeeming investor exits the main portfolio and keeps the segregated units. She does not get cash for both.
- No trustee approval means no split. Subscriptions and redemptions are then processed on the total portfolio NAV.
- The cost wall runs one way. The segregated portfolio's costs can never be charged to the main portfolio, and the main portfolio's simple average expense is the ceiling for the segregated portfolio's TER.
- Both portfolios have the same number of units on day one, which is why the two NAVs add back to the pre-event NAV.
- This is not the core portfolio. Core and satellite is an asset allocation idea for an investor; the main portfolio is a regulatory split inside one scheme after a credit event.
Where this is taught
Free preparation for NISM Series V-ARelated terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Segregated portfolioA ring-fenced sub-portfolio holding the debt instrument hit by a credit event, split out of a scheme so that the good assets stay liquid and exiting investors cannot leave the damaged paper behind.
- Total Expense RatioThe all-in annual cost of a mutual fund scheme as a percentage of daily net assets — the base expense ratio plus brokerage, transaction cost and statutory levies — charged to the scheme, not billed to the investor.
- Credit eventAn adverse credit development, such as a rating downgrade by a SEBI-registered CRA or an actual default, that permits a debt fund to create a segregated portfolio. In a CDS it triggers the protection payment.
- GatingA temporary restriction on mutual fund redemptions, allowed only in a market-wide crisis, for at most 10 working days in any 90 days — and never on the first Rs 2 lakh of any redemption request.
- Core and satelliteA portfolio built from a large, low-cost, usually passive core — about 70% to 80% — plus smaller satellite portions managed actively to capture shorter-term opportunities.