Study guide
8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio
NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam
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1 Chapter 1: Introduction & Exam Overview
1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan
2 Chapter 2: Investment Landscape
2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help
3 Chapter 3: Concept and Role of a Mutual Fund
3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India
4 Chapter 4: Legal Structure of Mutual Funds in India
4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI
5 Chapter 5: Legal and Regulatory Framework
5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries
6 Chapter 6: Scheme Related Information
6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures
7 Chapter 7: Fund Distribution and Channel Management Practices
7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor
8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units
8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio
9 Chapter 9: Taxation
9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST
10 Chapter 10: Investor Services
10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times
11 Chapter 11: Risk, Return and Performance of Funds
11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk
12 Chapter 12: Mutual Fund Scheme Performance
12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure
13 Chapter 13: Mutual Fund Scheme Selection
13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts
8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio
Key Takeaways Explain This Topic AI
A segregated portfolio separates distressed debt from the rest of a scheme following a defined credit event.
A credit event means a downgrade below investment grade, a subsequent downgrade, or an actual default.
All investors on the day of the credit event receive units in the segregated portfolio equal to their main-portfolio units.
No subscription or redemption is permitted in a segregated portfolio, which must be listed within ten working days.
No investment and advisory fees may be charged on a segregated portfolio, and recovery-related legal costs are capped at 20 basis points.
Last updated: August 2026
The Problem Segregation Solves
A debt scheme holds a bond that defaults. Its recoverable value is unknown and may take years to establish. Two harms follow immediately if nothing is done:
Investors who redeem now take out cash at an NAV that still carries a guess at the defaulted bond's value. If the guess is too high, they leave with more than their share.
Investors who stay are left holding a larger proportional share of the distressed asset, and a scheme whose NAV cannot be relied upon.
Worse, redemption pressure forces the manager to sell good assets to meet exits, concentrating the bad asset among those who remain — the classic run dynamic.
Segregation of portfolio , commonly called side-pocketing , addresses this by separating the distressed holding into its own portfolio.
What Triggers Segregation
A segregated portfolio may be created only on a defined credit event at the issuer level:
- A downgrade below investment grade
- Subsequent downgrades of an already sub-investment-grade instrument
- Reverse downgrades following such an event
- An actual default in payment of interest or principal
The scheme must have enabled the facility in its Scheme Information Document. Segregation is not available for a mere fall in market price, an issuer's poor results, or a sector becoming unpopular. The trigger is a credit event, not a value judgement.
The Mechanics
The AMC decides on creation of a segregated portfolio on the day of the credit event .
Trustee approval is sought; if approved, segregation is effective from the day of the credit event .
Every investor holding units on the day of the credit event receives units in the segregated portfolio equal in number to their units in the main portfolio.
The main portfolio continues to operate normally, with an NAV reflecting only its remaining, valuable assets.
Units of the segregated portfolio must be listed on a recognised stock exchange within ten working days of creation.
Step 3 is the equitable core. The distressed asset stays with exactly the investors who owned it when it went bad . An investor who subscribes the next day gets a clean main portfolio and no claim on the defaulted bond, which is correct — they took none of that risk.
Pricing and Redemption
- Feature Main portfolio Segregated portfolio
- Subscription Permitted Not permitted
- Redemption from the scheme Permitted at NAV Not permitted
- Exit route Ordinary redemption Sale on the exchange where listed
- NAV Published daily Published for the segregated portfolio separately
- Recovery Not applicable Distributed to segregated unitholders as and when realised
Because no redemption is possible from the segregated portfolio, the listing requirement is the investor's only liquidity . Units may trade at a steep discount, reflecting genuine uncertainty about recovery. An investor who wants out immediately takes that discount; one who waits receives whatever is actually recovered, when it is recovered.
As amounts are recovered from the defaulted issuer, they are distributed to the segregated portfolio's unitholders in proportion to their holding.
Expenses on a Segregated Portfolio
The rules are deliberately restrictive, because charging fees for managing an asset that is largely a recovery exercise would compound the investor's loss.
No investment and advisory fees may be charged on the segregated portfolio.
Other Total Expense Ratio components may be charged on a pro-rata basis only upon recovery of the investments in the segregated portfolio.
Legal charges related to recovery may be charged to the segregated portfolio in proportion to the amount recovered, subject to a cap of 20 basis points per annum of the daily net assets of the segregated portfolio.
Costs above that cap are borne by the AMC , not by investors.
Governance Safeguards
Because segregation could otherwise be used to hide poor credit selection, the framework requires:
Trustee approval for creation
Immediate disclosure to SEBI and to unitholders, including the credit event, the security segregated, and its value
- Ongoing disclosure of the segregated portfolio's NAV and recovery progress
- Enabling provisions in the Scheme Information Document in advance
- What a Distributor Should Say
Investors typically hear about segregation on the day it happens and assume money has been lost. The accurate framing:
"The scheme has moved one defaulted bond into a separate portfolio. Your holding in the main portfolio is unaffected and continues normally. You also hold units in the segregated portfolio representing your share of that bond. Those cannot be redeemed from the fund but will be listed, and you will receive your share of whatever is recovered. Nothing has been written off permanently — the value is uncertain, and segregation prevents that uncertainty from affecting the rest of your investment."