Reviewed by Sep 30, 2020| Updated on
Segregation refers to the separation or carving out of certain segment or individual items from a group. For example, securities investments may be segregated and identified for onward investment. Segregation is based on pre-determined criteria ranging from facilitating comparison between companies in the same segment or investing in a basket of securities.
In the portfolio management services (PMS) industry, a firm has to segregate investors' funds in their overall pool of funds. The segregation enables tracking of the funds and investments made out of such funds. Further, the investments need to be monitored from a performance perspective. Segregation also helps in tracking the performance and reshuffling of investments.
Certain securities firms or brokerage firms may segregate funds from investors, such as those having a high-risk appetite from the other funds. The segregation will add the funds to the risky investments pool, which offers high returns. The segregation happens based on the type of the client and the preferences of the client.
The securities firms have to file reports with the regulatory authorities on the segregation of client funds from their own funds. The Securities and Exchange Board of India (SEBI) regulates the securities market in India and protects the interest of investors. Similarly, the Securities and Exchange Commission (SEC) regulates the securities market in the US.
Apart from the maintaining of segregated customer accounts, the brokerage firms are also required to maintain the margin and reserves for their client accounts. The firms have to report the closing balances in client accounts on a quarterly basis.
Segregation prevents the mingling of client money with the firm's money and facilitates the safety of the investor's money. In the case of PMS clients, the regulations require close reporting and monitoring of the use of client monies.
In the case of individual broker accounts, the individuals can make their investment decisions themselves about the purchase and sale of securities on the stock exchange. In the case of a mutual fund, the decisions are made by the asset management company.