NFO Review: Kotak Equity Savings Fund
Sep 23, 2014

Author: PersonalFN Content & Research Team

Kotak Equity Savings Fund

An open-ended equity fund which aims to generate capital appreciation and income by predominantly investing in arbitrage opportunities.

Summary

Type	An open-ended equity fund	Benchmark Index	75% of Crisil Liquid Fund Index & 25% in CNX Nifty
Min. Investment: Additional purchase:	For Lumpsum -> Rs 5,000 and in multiples of Re 1 for purchases thereafter and Re 0.01for switches For Systematic Investment Plan (SIP) - > Rs 1,000 (subject to minimum 6 instalments of Rs 1,000 each) Rs 1,000 and in multiples of Re 1 thereafter for purchases and Re 0.01for switches	Plans: Options (under each plan):	Direct; and Regular Growth Dividend (Re-investment and Payout)
Face Value	Rs 10 per unit	Expense Ratio:	Upto 2.50%* *Direct Plan shall have a lower expense ratio excluding distribution expenses, commission, etc. and no commission for distribution of Units will be paid / charged under Direct Plan
Entry Load	Nil	Exit Load:	1.00% for exit within 1 year from the date of allotment of units Nil for exit after 1 year from the date of allotment of units
Issue Opens	September 17, 2014	Issue Closes:	October 01, 2014

Investment Objective*

The investment objective of the scheme is “to generate capital appreciation and income by predominantly investing in arbitrage opportunities in the cash and derivatives segment of the equity market, and enhance returns with a moderate exposure in equity & equity related instruments.”

*Source: Scheme Information Document

Is this fund for you?

Kotak Equity Savings Fund (KESF) is positioned as an equity scheme, but predominantly intended to seek arbitrage opportunities in the cash and derivatives segment of the Indian equity market, wherein it could have an exposure to equivalent stock/ index futures and create completely covered positions. KESF at the same time may also take exposure to unhedged equities in its endeavour to generate capital appreciation. Also in case of defensive circumstances and where income opportunities are available, the fund may also invest in debt & money market instruments in a dynamic manner.

You see, the equity market is not always efficient. There could be mispricing in the derivative market and the underlying cash market, and that's there where arbitrage opportunities exist which enables to make gains. KESF aims to exploit such arbitrage opportunities using different techniques, but in case where such opportunities do not exist and / or there is an income opportunity available, will invest in debt and money market instruments in a dynamic manner.

Exploiting arbitrage requires time and skills. Not all investors can do it. Hence for those who wish to take taking advantage of such arbitrage opportunities, such a unique offering can be a good fit provided you are well-informed about how the offering works. Moreover, as compared to taking exposure directly in equity along with derivatives and playing the markets, such a fund is less risky. But mind you, the success of such a unique offering is contingent upon:

Market volatility (which facilitate arbitrage opportunities);
Ability of fund houses to get access to real time market data
Risk-free rate of return; and
Income opportunities

Market volatility and risk-free returns are the factors that are beyond the control of the fund manager. Thus there is no guarantee that there will always be arbitrage opportunities available. This therefore leaves some margin for error.

Hence, such a unique offering which could be compared to Monthly Income Plans (MIPs), (barring the fact that KESF is an equity mutual scheme making it conducive for investors from a taxation perspective) and is appropriate for those with a moderate-to-high high risk appetite.

Portfolio & Investment Strategy

KESF in its aim to meet its investment objective, will have a predominant exposure to equities by exploiting arbitrage opportunities existing in the market (which denotes hedged equity positions) through equivalent stock/ index futures and creation of completely covered positions. Moreover, the fund may also take diminutive (not exceeding 15 - 25% of the net assets) to net long directional positions (which denotes unhedged equity) aimed at gaining from capital appreciation. And while selecting stocks for the unhedged equity positions, the fund will follow a combination of top-down and bottom-up approach to investing. While selecting stocks, KESF will select those which have the potential of growth at reasonable valuations. KESF does not have any defined constraints either to maintain or limit portfolio turnover. Thus looking at the structure and objective, the portfolio turnover ratio of the fund is likely to be high.

It is noteworthy that, if the debt / money market instruments offer better returns than the arbitrage opportunities available in cash and derivatives segments of equity markets, then the investment manager may choose to have a lower equity exposure and may flexibly invest in debt & money market instruments.

The performance of KESF will be tracked against 75% of Crisil Liquid Fund Index and 25% in CNX Nifty. CRISIL Liquid Fund Index seeks to track the performance of a debt portfolio that includes Collateralised Borrowing and Lending Obligations (CBLO), Commercial Papers (CPs) and Certificates of Deposit (CDs). The same is appropriate for benchmarking the income generated by the equity arbitrage opportunities which constitutes the significant part of the portfolio. The CNX Nifty is a well diversified 50 stock index accounting for 23 sectors of the economy. It is appropriate for benchmarking unhedged equity portion of the portfolio which would be a maximum of 25% of the scheme.

The asset allocation which will be followed by the fund will be as under:

Asset Class	Instruments	Indicative Allocation (% of net assets)		Risk Profile
Asset Class	Instruments	Minimum	Maximum	High/Medium/Low
A	Equity and Equity Related Instruments including derivatives	65	90	Medium to High
A1	Of which Cash-Future Arbitrage*	40	75	Low to Medium
A2	Of which Net Long Equity Exposure**	15	25	High
B	Debt & Money market instruments (including margin of derivatives)	10	35	Low

(Source: Scheme Information Document)

Asset Class	Instruments	Indicative Allocation (% of net assets)		Risk Profile
Asset Class	Instruments	Minimum	Maximum	High/Medium/Low
A	Equity and Equity Related Instruments including derivatives	25	65	Medium to High
A1	Of which Cash-Future Arbitrage*	0	50	Low to Medium
A2	Of which Net Long Equity Exposure**	15	25	High
B	Debt & Money market instruments (including margin of derivatives)	35	75	Low

* This denotes only hedged equity positions by investing in arbitrage opportunities in the equity market. The fund manager in the above case can therefore take exposure to equivalent stock/ index futures & create completely covered positions. Eg. - The scheme invests 65% in equity stocks/index basket in the cash market and takes short position in futures market for relevant stocks/ index to the extent of exactly 65% to avail arbitrage between spot & futures market. Thus the entire position is used to lock arbitrage profit.
** This denotes only net long equity exposures aimed to gain from potential capital appreciation of these positions. Thus it is a directional equity exposure which is not hedged.
Note1: The above asset allocation for defensive consideration will be for a maximum period of 30 days within which the asset allocation will be rebalanced back to as indicated above for normal circumstances. Note2: The scheme shall not invest in ADR/GDR, foreign securities and Securitised Debt and shall not involve in short selling of securities.

(Source: Scheme Information Document)

Fund Manager Profile

KESF will be managed by the duo Mr Deepak Gupta and Mr Abhishek Bisen.

Mr Gupta has an experience of 7 years in the mutual fund industry, of which 5 years is in the area of fund management. Mr Gupta is a commerce graduate (B.Com) from the University of Mumbai and is also a qualified Chartered Accountant as well as a Cost Accountant. He has also cleared the CFA - Level III. At Kotak Mutual Fund, Mr Gupta manages Kotak Equity Arbitrage Fund, Kotak Equity FOF, Kotak Sensex ETF, Kotak PSU Bank ETF, Kotak Nifty ETF, Kotak Global Emerging Market Fund, Kotak TaxSaver and Kotak Multi Asset Allocation Fund

Mr Bisen is the fund manager for fixed income at Kotak Mutual Fund and he been associated since October 2006. Prior to joining Kotak Mutual Fund Mr Bisen has worked with Securities Trading Corporation Of India Ltd. (where he was working at sales and trading of fixed income products apart from doing portfolio advisory) and his earlier assignment include 2 years of merchant banking experience with a leading merchant banking firm. At Kotak Mutual Fund, at present he manages Kotak Bond Fund, Kotak Bond Short Term Fund, Kotak Gilt - Investment, Kotak Banking & PSU Debt Fund, Kotak Gold ETF, Kotak Multi Asset Allocation Fund (debt portion), Kotak Flexi Debt Fund, Kotak Floater - Long Term<, Kotak Liquid, Kotak Floater - Short Term, Kotak Income Opportunities Fund, Kotak Balance (debt portion), Kotak Select Focus Fund (debt portion), Kotak Monthly Income Plan (debt portion) and Kotak Classic Equity (debt portion).

Fund Outlook

As per the mandate while KESF aims to exploit arbitrage opportunities existing in the market and thus predominantly create hedge positions in equity, equity related instruments and derivatives (through equivalent stock / index futures and creation of completely covered positions); the returns generate by the fund will be contingent upon market volatility (which facilitate arbitrage opportunities), ability of fund houses to get access to real time market data, risk-free rate of return; and income opportunities. Market volatility and risk-free returns are the factors that are beyond the control of the fund manager. Thus there is no guarantee that there will always be arbitrage opportunities available. This will always leave small margin for errors.

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