Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund: Should You Invest in This Target Maturity Index Fund?
Mitali Dhoke
Feb 05, 2022
Listen to Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund: Should You Invest in This Target Maturity Index Fund?
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Interest rates on traditional products have been unattractive for a few years. Investors thus have been looking for alternate options that could yield better tax-adjusted returns at low costs. These characteristics are present in passive debt index funds, which appear to be a good option for investors with less risk appetite while clocking returns from the debt markets.
India's debt market has been growing in size over the past few years. One of the alternatives in the debt fund space for investors with moderate risk appetite is Target maturity funds (TMFs). Recently, the debt mutual funds in the target maturity segment are gaining traction, and where the most significant retracement has occurred in the 5-year yields on the AAA and SDL curves.
As per historical data, debt mutual funds have proven to be a viable asset class from a portfolio diversification point of view. Target maturity funds offer decent returns, and if you hold them until maturity, these funds would be less volatile.
Kotak Mahindra Mutual Fund has launched Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund. It is an open-ended Target Maturity Index Fund investing in the Nifty SDL Apr 2027 Top 12 Equal Weight Index constituents. The scheme will invest in State Development Loans (SDLs) issued by the state governments and union territories that form part of the Nifty SDL Apr 2027 Top 12 Equal Weight Index.
The investors, especially retail participants, can own a pie of state debt through the launch of this fund and diversify their investment portfolio.
Table 1: Details of Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund
| Type |
An open-ended Target Maturity Index Fund investing in constituents of Nifty SDL Apr 2027 Top 12 Equal Weight Index. A relatively high-interest rate risk and relatively low credit risk. |
Category |
Index Fund |
| Investment Objective |
The investment objective of the scheme is to track the Nifty SDL Apr 2027 Top 12 Equal Weight Index by investing in SDLs, maturing on or before Apr 2027, subject to tracking errors. However, there is no assurance or guarantee that the investment objective of the scheme will be achieved. |
| Min. Investment |
Rs 5,000 and in multiples of Re 1/- thereafter. Additional Purchase Rs 1,000/- and in multiples of Re. 1 thereafter. |
Face Value |
Rs 10/- per unit |
| SIP/SWP/STP |
Available |
|
|
| Plans |
|
Options |
- Growth
- Income Distribution cum capital withdrawal (IDCW)
|
| Entry Load |
Not Applicable |
Exit Load |
Nil |
| Fund Manager |
Mr Abhishek Bisen |
Benchmark Index |
Nifty SDL Apr 2027 Top 12 Equal Weight Index |
| Issue Opens |
February 04, 2022 |
Issue Closes |
February 09, 2022 |
(Source: Scheme Information Document)
The investment strategy for Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund will be as follows:
Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund will be passively managed, and it employs an investment approach designed to track the performance of the Nifty SDL Apr 2027 Top 12 Equal Weight Index.
The scheme will follow the Buy and Hold investment strategy in state government securities will be held till maturity unless sold for meeting redemptions/rebalancing. The Scheme shall replicate the index completely. In case the Scheme is not able to replicate the index, the Fund Manager may invest in other issuances within limits specified and subject to conditions laid down by the SEBI circular dated November 29, 2019, as amended from time to time.
The scheme's performance may not be able to commensurate with the performance of the respective benchmark of the scheme on any given day or over any given period. Such variation is commonly referred to as tracking error. The scheme intends to maintain a low tracking error by actively managing the portfolio in line with the index.
A small portion of the net assets will be held as cash and/or invested in debt and money market instruments permitted by SEBI/RBI. The scheme's exposure to money market instruments will be in line with the asset allocation table. However, in the case of the maturity of instruments in the scheme's portfolio, the reinvestment will be in line with the index methodology.
Under normal circumstances, the Asset Allocation will be as under:
Table 2: Asset Allocation for Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund
| Instruments |
Indicative Allocation (% of net assets) |
Risk Profile |
| Minimum |
Maximum |
High/Medium/Low |
| Replication of securities covered by Nifty SDL Apr 2027 Top 12 Equal Weight Index |
95 |
100 |
Low to Medium |
| Cash and debt/money market instruments** |
0 |
5 |
Low |
**Investment in Debt instruments (for liquidity purpose) will be of less than 1-year residual maturity
(Source: Scheme Information Document)
This allocation will be monitored periodically and it shall be ensured that investments are made in accordance with the Scheme objective and within the regulatory and internal investment restrictions prescribed from time to time.
As regards risk mitigation, broad risk parameters of the portfolio of the Scheme such as credit rating, weighted average YTM, weighted average maturity, asset allocation etc. are expected to be similar to the Underlying Index.
Few of the key risk identified are:
| Risk & Description specific to the Scheme |
Risk mitigants / Management Strategy |
Market/Volatility Risk
Risk arising due to price fluctuations and volatility, having material impact on the overall returns of the Scheme. |
The Scheme, being a Target Maturity Date Index structure, is expected to follow a Buy and Hold investment strategy in a passive manner. Based on that, we expect to mitigate intermittent price volatility in the underlying assets. Investors who remain invested until the maturity of the Scheme are expected to mitigate market / volatility risk to large extent. |
Credit risk
Risk associated with repayment of investment |
The Scheme seeks to track SDLs which are considered as relatively safe. |
Liquidity risk
Risk arising due to inefficient Asset Liability Management, resulting in high impact costs |
The Scheme that seeks to track SDLs which has higher level of secondary market liquidity. |
Interest rate risk
Price volatility due to movement in interest rates |
The Scheme, being a Target Maturity Date Index structure, is expected to follow a Buy and Hold investment strategy in a passive manner. All investments will be in line with the maturity date of the Scheme and the underlying Index. This should help mitigate the interest rate risk. |
The AMC would incorporate adequate safeguards for controlling risks in the portfolio construction process. The Scheme has a detailed process to identify, measure, monitor and manage various portfolio risks.
About the benchmark
The Nifty SDL Apr 2027 Top 12 Equal Weight Index is the benchmark of the Scheme. The index seeks to measure the performance of the portfolio of 12 SDLs maturing during the twelve-month period ending April 30, 2027.
The index is computed using the total return methodology, including price return and coupon return. The index represents the performance of the maturity-targeted SDL market. The index holds SDLs issued by states/UTs, maturing during the twelve-month period ending April 30, 2027. Each state/UT that is a part of the index is given equal weight as on the base date of the index. The weight of each issuer in the index is capped at 15%. The index is reviewed at the end of every calendar quarter.
Here's the list of top constituents under the Nifty SDL Apr 2027 Top 12 Equal Weight Index as of December 31, 2021:
(Source: Scheme Information Document)
Who will manage Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund?
The designated fund manager for this scheme is Mr. Abhishek Bisen. He holds a BA degree in Management and an MBA in finance. His key responsibilities include fund management of debt schemes. Before Kotak AMC, Mr. Bisen has worked with Securities Trading Corporation of India Ltd. under the Sales & Trading division for Fixed Income Products, apart from doing Portfolio Advisory. His earlier assignments include 2 years of merchant banking experience with a leading merchant banking firm.
At Kotak Mutual Fund, Mr. Bisen currently manages Kotak Bond Fund, Kotak Gilt fund, Kotak Debt Hybrid Fund, Kotak Gold Fund, Kotak Gold ETF, Kotak Equity Savings Fund, Kotak Equity Hybrid Fund, Kotak Balanced Advantage Fund, Kotak NASDAQ 100 Fund of Fund, Kotak Nifty Alpha 50 ETF and Kotak Nifty 50 Index Fund.
Fund Outlook - Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund
Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund is a passively managed debt index fund that aims to replicate the performance of the Nifty SDL Apr 2027 Top 12 Equal Weight Index, subject to tracking errors.
The scheme seeks to invest in 12 State Development Loans (SDLs) under the index that matures on April 30, 2027. It provides investors exposure to Government-backed instruments like SDLs allows investors to buy/sell as required without any lock-in period. It assists you in meeting medium-term financial goals in line with the maturity period.
The proportion of investment per the underlying index into SDLs is in the ratio of 50:50. The scheme offers investors high credit quality with a diversified Debt portfolio. The target maturity approach offers investors the benefit of passively investing in individual bonds/SDLs through a Debt mutual fund structure. Thus the fortune of the Scheme will be closely linked with that of its benchmark index.
According to the Union Budget 2022-23, there may be higher-than-expected government borrowings of the centre and state governments that may push up the government bond yields. The government will borrow Rs 96,560 crore every month from the market. The Indian bond markets have already displayed discomfort in this respect, plus owing to the fact the going forward monetary policy normalisation may begin.
In addition, the US Federal Reserve signalling in their announcement a hike in interest rates from March 2022 and many other central banks raising rates, is also weighing down on the Indian debt market sentiments. In the near future, the bond market is expected to remain volatile. The interest rate risk amidst the dynamic market conditions is likely to have bearing on the scheme's performance.
Thus, Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund is suitable for investors with a moderately high-risk profile looking forward to building their Debt portfolio and ensuring a 5-year investment horizon to match the fund's portfolio duration.
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Warm Regards,
Mitali Dhoke
Jr. Research Analyst
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