Fabric in hem of poncho covered in mud (5)
I believe the answer is:
moire
'fabric' is the definition.
(moire is a kind of fabric)
'hem of poncho covered in mud' is the wordplay.
'hem of' says to take the final letters (hem can mean an edge or border).
'covered in' indicates putting letters inside.
'mud' becomes 'mire' (synonyms).
The last letter of 'poncho' is 'o'.
'o' going within 'mire' is 'MOIRE'.
'in' is the link.
(Other definitions for moire that I've seen before include "Description of wavy pattern" , "fabric" , "Watered silk" .)