Side pocketing in simple terms is separating the illiquid or bad assets from the liquid or good assets of a fund, i.e., creating a separate side pocket for the risker assets. This generally happens in the case of a rating downgrade, wherein the illiquid assets are shifted to another account and separate units are allocated to investors for these assets. This is to ensure that only the investors who are present at the time of side pocketing are penalised and subsequently also get the benefit if the amount is recovered in the future from those assets. Another benefit of side pocketing is that the liquidity of the main scheme is maintained, and redemptions and investments are made from the liquid assets of the fund. This also gives new investors the confidence to enter the fund.
Do certain categories of equity mutual funds work better in a volatile market?
Different categories of mutual funds perform well at different points of time. Equity as an asset class is for long-term investing and you should ignore the short-term volatility in the market. You can look at hybrid strategies such as dynamic asset allocation funds, which invest in various asset classes, such as equity, debt and cash. Investing across asset classes with low correlation provides diversification and can help manage market volatility to a certain extent.
Infrastructure funds have not been performing well for a few years. I plan to withdraw money from the infrastructure fund I had invested in. Can you suggest sectors or themes that you expect will do well in the coming years?
Infrastructure fund is a sectoral fund and the latter tend to have high cyclicality. Thus, it is advisable for you to stay invested for a longer tenure and not get swayed by short-term market volatility. In future, we expect the investment cycle to pick up. Drivers of capital spending now look better. Capacity utilisation has increased for airports, power, cement, oil refineries, chemicals, textiles, steel, capital goods and auto sector. The capex to depreciation ratio for BSE 500 companies has fallen below the long-term trend and asset turnover is higher than long-term trend, indicating the need to undertake investment. Corporates are better placed to undertake capital spending with improved leverage and interest coverage ratios. Given these tailwinds, we expect the capex cycle to revive, which will benefit companies in the industrial sector.
I want to start a systematic investment plan of Rs 10,000. I want to know if I should invest that amount at one go every month or invest Rs 2,500 on four different dates for better cost averaging.
Cost averaging is a factor of market movements which are not unidirectional and hence you cannot determine if one-time investment or spreading it over four different dates would be better. You can opt for either of the investment frequencies based on your cash flows. From a cash flow management perspective, investing Rs 10,000 at one go could be better as you can time it with your salary cycle and you can utilise the remaining money for your regular expenses. This will also remove the need to maintain a fixed balance in order to fulfill the SIP installment.
The writer is MD & CEO, SBI Mutual Fund. The views expressed are the expert’s own. Send your queries to firstname.lastname@example.org